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September 1, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

"Bring Back the Estate Tax Now"

Posted: 01 Sep 2010 12:42 AM PDT

Dear Deficit Hawks:

Bring Back the Estate Tax Now, by Robert Rubin and Julian Robertson, Commentary, WSJ: ...Congress is finally turning its attention to the expiring 2001 and 2003 tax cuts. But there is one tax issue that should have long since been addressed: the federal estate tax. That tax expired at the end of last year, and there have been no estate taxes levied this year. If a new estate tax is not enacted as soon as Congress returns from its August recess, this void will continue until the end of the year.
We would recommend continuing 2009's regime, with a top rate of 45% and a $3.5 million individual exemption. Small businesses and family farms can be protected both through the exemption (which is $7 million for a couple) and through special deferred payment rules.
We both believe that the estate tax should be a component of any federal tax system. ... A key criterion in choosing taxes is to have the least negative impact on economic activity. The estate tax, in our opinion, meets that test. An estate tax can provide revenue—with little, if any, adverse supply-side economic impact—to fund deficit reduction, additional public investment or added assistance to those affected by the economic crisis. ...
We also share the view that the estate tax is grounded in powerful philosophical underpinnings. Our nation views itself as a meritocracy and a land of opportunity and we have a proud legacy of upward mobility. An estate tax helps us promote this legacy, by avoiding the accumulation of inherited economic—and political—power that is antithetical to this historical vision of our society and to the vitality and dynamism that has contributed so much to our success. ...
Our country is losing revenue that, with its stressed fiscal conditions, it can ill afford to forego.

I don't have any disagreement with this. If anything, I'd favor even higher rates once the estate value passes certain thresholds, i.e. additional steps in the rates.

The Dynamic Properties of New Keynesian Models with Learning

Posted: 01 Sep 2010 12:24 AM PDT

[This one is, as they say, wonkisk.] As James Bullard noted in the previous post, we "have one of the world's experts on the question of the dynamics" of dynamic stochastic general equilibrium (DSGE) models here at the University of Oregon, particularly models that involve learning.

There has been considerable controversy recently about the dynamic properties of DSGE models near the zero bound, in particular whether raising the federal funds rate target can help to avoid falling into a deflationary trap. So I asked George to explain this on video, and he graciously agreed to do so. The bottom line is that in these models, the type of policy discussed by Minnesota Fed President Narayana Kocherlakota increases rather than decreases the chance of a deflationary spiral.Here's George Evans

Please note: As soon as we were done, George realized there was a typo on the whiteboard. The horizontal axis on both graphs should have the low inflation steady state inflation value labeled β instead of β-1. The value of .99 on the right-hand graph is correct.

Papers mentioned in the video:

links for 2010-08-31

Posted: 31 Aug 2010 11:03 PM PDT

Jim Bullard Responds to Tim Duy

Posted: 31 Aug 2010 01:37 PM PDT

Via email, Jim Bullard, President of the St. Louis Fed, responds to Tim Duy:

Hi Tim,

I read your "Fed watch" column this morning in our news clips.  You do an excellent job of summarizing important issues facing the FOMC.  I have three comments, all of which I have made publicly recently, and I think they are critical ones for the direction policy will take:

--on the "raising interest rates" question:  I am not sure if you have looked at my paper, "Seven Faces of the Peril," but if not please take a look at Figure 1 there (web page below) and contemplate the left hand side of the picture.  This convinces me that staying with the near-zero interest rate policy alone--and promising to stay near-zero for a long time without doing anything else--risks a deflationary trap.  To avoid this, I am recommending additional QE as a supplement to the near-zero rate policy as our best option.  You actually have one of the world's experts on the question of the dynamics behind Figure 1 at the U. of Oregon: George Evans.  Rajiv Sethi's summary of this issue as linked in your blog is very good, but citing Howitt--a fine paper, to be sure--is missing the more sophisticated analysis of Evans and Honkapohja that I cite in my paper.  I am not saying I necessarily agree with the Evans and Honkapohja policy conclusions, but they have good analytics for framing these issues.

--on the effectiveness of QE:  I do not agree that asset purchases are somehow ineffective.  I talk about this in my CNBC interview at Jackson Hole (also posted on my web page).  The direct empirical evidence on the effectiveness of QE both in the U.S. and the U.K. is fairly strong.  For example, see the paper by Chris Neely of our staff cited in the "Perils" paper.
--on the "disciplined" QE program:  The quote from Vince Reinhart, who is a great guy, gives the "shock and awe" view of QE.  I do not think this is remotely correct.  We know how monetary policy works:  through the expected future path of policy, not through the actual move on a particular day.  When we make 25 basis point moves on the federal funds rate, those are small viewed in isolation, but they have important effects for macroeconomic stabilization because they imply an expected interest rate path over the coming years.  The same is true for QE.  A move on a particular day may seem small, but it implies a path for future policy, and a series of smaller moves may add up to a very large move if the incoming data are consistent with such an outcome.  The "shock and awe" view, if applied to interest rate targeting, would suggest very large interest rate movements in response to relatively small changes in incoming data, a policy that most would view as destabilizing for the macroeconomy.  The same is true for QE.  So the point is that QE moves should be commensurate with the incoming data (a.k.a. "state contingent").  Of course we can argue about the incoming data--and I know you have strong views on that--but I think my position on a "disciplined" QE program is correct and that the dangerous policy is to make destabilizing moves out of line with the incoming data.  Concerning the data itself, your colleague Jeremy Piger will update his recession probabilities shortly so I will be anxious to see how that comes out.

I hope these comments are not too confused, I enjoyed your blog and I think you do a fine job of tracking the issues in the Fed.

Best regards,


I am about to do a video with George Evans who will explain the issues involved with dynamics at the zero bound, how Howitt fits in, how learning changes things, etc., so please stay tuned...

Insulating Fiscal Policy from a Dysfunctional Congress

Posted: 31 Aug 2010 08:46 AM PDT

I have a new column up at the Fiscal Times:

Insulating Fiscal Policy from a Dysfunctional Congress: The economic crisis has made two things clear. First, monetary policy won't always be capable of stabilizing the economy on its own. When the problems become large enough, fiscal policy must be part of the response.

Second, even when our economic problems are severe and righting the ship ought to be the primary concern, Congress is incapable of implementing fiscal policy with the timeliness and effectiveness that is needed. As Alan Blinder said recently, "I'm looking at the political system turning itself into a paralyzed beast." ... [...continue reading...]

Is there a way around this problem?

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