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October 22, 2011

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Latest Posts from Economist's View

Raise Taxes on the Wealthy: It’s the Fair Thing to Do

Posted: 22 Oct 2011 12:42 AM PDT

When this column appeared appeared on, it got over 500 comments (it was originally published here). I didn't read them, the 73% thumbs down (plus the email I received) was enough to tell me what the comments probably said, and a few people who did read them said I shouldn't bother -- for the most part they hated it.

Here's the unedited version:

Raise Taxes on the Wealthy: It's the Fair Thing to Do: Many economists worry that making societies more equal through income redistribution lowers economic growth. This "big tradeoff" between equality and efficiency, which is supported by comparisons of capitalist and socialist countries, implies that there is a limit to how much redistribution a society should pursue. At some point the tradeoff of more equality for less output – which worsens as we push toward more and more equality – becomes intolerable.

The Bush tax cuts were justified, in part, by the claim that equity had overshadowed efficiency in tax policy decisions. Taxes on the wealthy and the inefficiencies that come with them were much too high, it was argued, and lowering taxes would cause output to go up enough to lift all boats substantially. Accordingly, the lower end of the income distribution would fare much better after income trickled down than it would under redistributive policy.

The economy did grow after the tax cuts, but the rate of growth was unremarkable, especially for jobs, and there's little evidence that the Bush tax cuts caused large increases in output growth as promised. In fact, there's little evidence that they had any effect at all.

And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society. Workers were helping to increase the size of the pie, but income did not trickle down as promised and their share of the pie was no larger than before.

This is not the only way in which the distribution of income has become disconnected from productivity. While some argue that those at the top of the income distribution earn every cent they receive, and hence deserve to keep all of it, there is plenty of evidence that the income of financial executives, CEOs of major corporations, etc. exceeds the value of what they contribute to society by a considerable margin. That holds true even without the financial crisis, but how, exactly, can we justify the extraordinarily high income of this group when the result of their actions was to ruin the economy?

If those at the top of the income distribution receive far more than the value of what they create, and those at lower income levels receive less, then one way to correct this, at least in part, is to increase taxes at the upper end of the income distribution and use the proceeds to protect important social programs that benefit working class households, programs that are currently threatened by budget deficits. This would help to correct the mal-distribution of income that is preventing workers from realizing their share of the gains from economic growth.

And there is another reason why taxes on the wealthy should go up. Someone has to pay taxes, and the question is how to distribute the burden among taxpayers. Many believe, and I am one of them, that progressive taxes are the most equitable way to do this. In particular, the last dollar of taxes paid should cause the same amount of sacrifice for rich and poor alike.

There has been an attempt to make it appear that taxes are mostly paid by the wealthy, e.g. the deceptive claim that half the people pay no taxes is part of this. But taxes are less progressive than before the Bush tax cuts, and when all taxes at all levels of government are taken into account "the U.S. tax system just barely qualifies as progressive." Making taxes more progressive would, in my view, make them more equitable.

We face a choice between cutting key benefits for the middle class and creating an ever more unequal society, or raising taxes on the wealthy to preserve the social programs that lower income households rely upon. We hear that raising taxes is unfair, and that tax increases will harm economic growth. But there's nothing unfair about correcting the mal-distribution of income that we've seen in recent decades, or about making sure the burden from paying taxes is more equitable than it is now. And there's no reason to fear that economic growth will be lower if taxes are increased. Cutting taxes on the wealthy during the Bush years didn't stimulate growth and raising taxes back to the levels we've had in the past – times when growth was quite robust – won't have much of an effect either.

The claim that there is a tradeoff between equity and efficiency was a key part of the argument for tax cuts for the wealthy, but the tradeoff didn't materialize. We sacrificed equity for the false promise of efficiency and growth, and society is now more unequal than at any time since the early part of the last century. It's time to reverse that mistake.

"The Flat-Tax Fraud"

Posted: 22 Oct 2011 12:33 AM PDT

Robert Reich does not like the flat tax (I don't either):

The Flat-Tax Fraud, and the Necessity of a Truly Progressive Tax, by Robert Reich: Herman Cain's bizarre 9-9-9 plan would replace much of the current tax code with a 9 percent individual income tax and a 9 percent sales tax. He calls it a "flat tax." Next week Rick Perry is set to announce his own version of a flat tax. ...
The flat tax is a fraud. It raises taxes on the poor and lowers them on the rich. ... The rich usually pay a higher percent of their incomes in income taxes than do the poor. A flat tax would eliminate that slight progressivity.
Nowadays most low-income households pay no federal income tax at all – a fact that sends many regressives into spasms of indignation. They conveniently ignore the fact that poor households pay a much larger share of their incomes in payroll taxes, sales taxes, and property taxes (directly, if they own their homes; indirectly, if they rent) than do people with high incomes. ...
The truth is the current tax code treats everyone the same. It's organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).
For example, no one pays any income taxes on the first $20,000 or so of their income... People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.
So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he's only talking about the portion peoples' incomes that exceed $250,000. He's not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.
Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small business owners with incomes of $251,000 a year would suddenly have to pay 39 percent of their entire incomes in taxes rather than 35 percent. Wrong. They'd only have to pay the 39 percent rate on $1,000 – the portion of their incomes over $250,000. ...
The Republicans' push for a flat tax masks what's really going on.
Remember: The top 1 percent is now raking in over 20 percent of the nation's total income and owns over 35 percent of the nation's wealth. Under almost anyone's view of fairness, these are grotesque portions. They're especially large relative to what they were as recently as thirty years ago, when the top 1 percent raked in under 10 percent. And these huge portions at the top continue to increase.
Simple fairness requires three things: More tax brackets at the top, higher rates in each bracket, and the treatment of all sources of income (capital gains included) exactly the same. ...

The confusion over marginal tax rates (i.e. that higher tax rates only apply to income past certain thresholds) is widespread and an obstacle to progressive tax reform.

"The Kids Camping on Wall Street Are The Capitalists"

Posted: 22 Oct 2011 12:24 AM PDT

Bruce Judson:

The Kids Camping on Wall Street Are The Capitalists, Not the People in the Buildings, by Bruce Judson: Today, some of the leading capitalists in the nation are located on Wall Street. Sadly, it is the protesters outside who are literally on the street who embody the ideal rewards and responsibilities of capitalism, not the financiers who occupy the buildings. ...
Many of the protestors in New York City and around the country are jobless college graduates. The majority in all likelihood financed their education through federally subsidized student loans. A central characteristic of today's generation of student loans is that, unlike most debts, they cannot automatically be discharged in bankruptcy. As a consequence, they are one of the few expenses in our society for which an individual is likely to be accountable throughout his life. As a nation, we teach our most promising youth, from the age of 18 on, the importance of accountability. We use the federal government to subsidize an investment in human capital. In return, the beneficiaries enter into a lifetime of responsibility and accountability. It is a sacred contract. It is arguably one of the best, and potentially harshest, lessons of accountability associated with capitalism in our society today.
Now, let's contrast this high accountability with the behavior that occurred in our financial sector. When our largest financial firms created havoc in the U.S. economy through undisputed greed, mismanagement, and extreme risk, some important things happened. First, the government bailed the companies out without demanding any substantial change in behavior, and then the individuals responsible were not held accountable through civil or criminal law. As a result, the people who brought the nation close to the brink of economic collapse and caused untold pain and suffering — which continues to this day — returned after a brief hiatus to record levels of compensation. Individuals who earned tens of millions of dollars continue to earn these extraordinary sums. They have never been called to account for their deeds. ...
Now let's contrast the kids on the street with the employees of The Street. The kids are accountable for their debts. They know it, and they simply want jobs so they can fulfill their civic responsibilities. In contrast, the occupants of the building on Wall Street act as if the rules of accountability — which are central to a viable system of capitalism — apply to everyone except them. Instead, many of the Wall Street elite have developed a dangerous sense of entitlement. ...

links for 2011-10-22

Posted: 22 Oct 2011 12:06 AM PDT

Fed Watch: On That Double-Dip

Posted: 21 Oct 2011 11:34 AM PDT

Tim Duy:

On That Double-Dip, by Tim Duy: Dean Baker admonishes those concerned about a double-dip:

...The economy looks to be growing in a range of 2-3 percent. This is roughly fast enough to keep even with the growth of the labor force. That implies that we are making zero progress in putting people back to work.

Unfortunately, because many economists misread the economy and raised the specter of a double-dip, this slow growth is likely to be seen as good. It isn't and the double-dippers have done the country a serious disservice by creating a set of incredibly low expectations against which economic performance is now being measured.

As I have previously stated, the economy was clearly not in recession in the third quarter, and therefore near-term data would certainly not be consistent with a recession. Indeed, this has been the case. If you expected the bottom to fall out of the economy in the fall, you have been disappointed.

Moreover, the primary reason to believe in a reasonably high probability of recession had little to do with the US data to begin with. To be sure, the overall low rates of growth in this "recovery" does imply that downward negative shocks will push us more easily into recession, and this suggests we may face an increase in recession scares in the years ahead. That said, the first half slowdown is really only a supporting character in the recession story. The lead character was and remains the European situation.

And despite the seemingly endless optimism on Wall Street that Europe will come to an agreement that forestalls a deeper crisis, the reality appears to be very different. My interpretation is the press reports suggest complete and total disarray among European government, as 17 economies all with different objective functions struggle to define the meaning of "Union." This is not stuff for the feint of heart. The differing objective functions and the subsequent need to make all parties happy by itself suggests that at best only a partial solution is at hand, and we are way beyond partial solutions. Moreover, beyond governmental agreement comes the issues of force feeding capital to the banks and the willingness of Greece's bondholders to accept a significantly higher haircut without creating a credit event. I kind of hate to be a pessimist, but good luck putting all that in place by next Wednesday.

Meanwhile, as Edward Harrison points out, while Wall Street may be buying what the EU is selling, European financiers see the writing on the wall. Italian yields are nearing 6%, effectively unwinding the efforts of the ECB to contain the crisis with their earlier bond-buying campaign. Moreover, yield spreads throughout Europe are blowing out. Calculated Risk was always found of saying "we are all subprime now." Well, increasingly it looks like all of the Eurozone is the periphery.

Finally, over at The Street Light, Kash reports Greece is most likely on their last austerity package:

Greece will continue to miss the deficit targets set by the troika. The ECB can continue to demand that Greece raise taxes and cut spending by even more, but further austerity-punishment will not help. At some point very soon Germany is going to have to make a simple decision: does it, for its own self-interest, come up with the money needed to fix this crisis, irrespective of what's happening in Greece; or does it say no, and elevate the crisis by an order of magnitude. I wish I had confidence in the answer.

Does this get better before it gets worse? History says no. Back to Edward Harrison:

It seems to me that we risk a true Armageddon scenario here from dithering.

A major credit event in Europe looks inevitable. Would a European meltdown endanger the US recovery? We are looking at two channels, trade and financial. I tend to discount the trade channel. As a general rule, I think the propagation of such shocks is too weak to alter the fundamental cyclical forces underlying the US economy. The potential for financial shocks, however, keeps me up at night - this is the key to the US recession story. There is a nontrivial chance that credit event in Europe triggers a credit event in the US. This following quote from Bloomberg only increases my unease:

"We have looked very carefully at bank exposures both to foreign sovereigns and to foreign banks," Bernanke said. "The exposures of U.S. banks to the most troubled sovereigns --Portugal, Ireland and Greece -- is quite minimal. So the direct exposures there are not large."

That sounds just a little too much like there is no housing bubble and the subprime crisis is "contained." When it comes to how financial events resonate throughout the US economy, it seems best to bet against Federal Reserve Chairman Ben Bernanke.

Because of the uncertainties surrounding the European crisis and whether or not it induces a regime change in the US economy, forecasters lack conviction about the recession calls, with most circling around 50-50. At the same time, however, I don't see that the competing forecast could in anyway be called optimistic. Optimistic relative to recession, but the baseline forecast remains that of an economy still struggling along in the 2-3% range - a range no one thinks is acceptable given the current high levels of unemployment.

Finally, the forecasts of a double-dip did not do a disservice by changing expectations, as Baker suggests. In fact, I think clearly the opposite occurred. The concerns about the double-dip prodded the Federal Reserve to step up their stimulus efforts, with possibly more on the way. Ultimately, the Federal Reserve was pushed to go where it should have been in the first place.

P.S. I think that we are sufficiently past the last recession that the next recession stands on its own. The term "double-dip" is not really accurate.

NBER Economic Fluctuations & Growth Research Meeting

Posted: 21 Oct 2011 08:40 AM PDT

I am here today:


EF&G Research Meeting

October 21, 2011

Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, Illinois

George-Marios Angeletos and Martin Schneider, Organizers



6:30 pm

Reception and Dinner - Federal Reserve Bank of Chicago


9:00 am

Aysegul Sahin, Federal Reserve Bank of New York
Joseph Song, Columbia University
Giorgio Topa, Federal Reserve Bank of New York
Gianluca Violante, New York University
Measuring Mismatch in the U.S. Labor Market

Discussant: Robert Shimer, University of Chicago and NBER

10:00 am - Coffee Break

10:30 am

Cristina Arellano, University of Minnesota and NBER
Yan Bai, Federal Reserve Bank of Minneapolis
Patrick Kehoe, Federal Reserve Bank of Minneapolis, Princeton University, University of Minnesota and NBER
Financial Markets and Fluctuations in Uncertainty

Discussant: Andrea Eisfeldt, UCLA

11:30 am

Raghuram Rajan, University of Chicago and NBER
Rodney Ramcharan, Federal Reserve Board
The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s

Discussant: Sydney Ludvigson, New York University and NBER

12:30 pm - Lunch

1:30 pm

Per Krusell, Stockholm University and NBER
Toshihiko Mukoyama, University of Virginia
Richard Rogerson, Princeton University and NBER
Aysegul Sahin, Federal Reserve Bank of New York
Is Labor Supply Important for Business Cycles?

Discussant: Marcelo Veracierto, Federal Reserve Bank of Chicago

2:30 pm - Coffee Break

3:00 pm

Eric Sims, University of Notre Dame and NBER
Permanent and Transitory Technology Shocks and the Behavior of Hours: A Challenge for DSGE Models

Discussant: Jonas Fisher, Federal Reserve Bank of Chicago

4:00 pm

Allen Head, Queen's University
Lucy Qian Liu, IMF
Guido Menzio, University of Pennsylvania and NBER
Randall Wright, University of Wisconsin, Madison and NBER
Sticky Prices: A New Monetarist Approach

Discussant: John Leahy, New York University and NBER

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