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November 1, 2011

Latest Posts from Economist's View

Latest Posts from Economist's View

"How My Taxes are Raised Matters"

Posted: 01 Nov 2011 12:24 AM PDT

We are not going to solve our long-term deficit problem without more revenue. Is it time for the mortgage interest deduction to go?:

How my taxes are raised matters, by Richard Green: .To get to fiscal balance, I need to pay higher taxes. ... The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates. If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.
If my income is taxed, the impact on my desire to work is ambiguous. On the one hand, because the cost of leisure would fall, I would have an incentive to work less. On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.
If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more. Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.

Who would this affect the most?:


The white bar in the graph shows the distribution of the home mortgage interest deduction. The deduction is concentrated in the upper end of the income distribution, e.g. 69% goes to households making at or over over $100,000 (in 2004).

From Suzanne Mettler, the source of the graph and statistics:

In an age of rising economic inequality, our nation has permitted the continuation of these submerged policies that aid primarily the most advantaged Americans and sharply reduce federal revenues, making programs that could assist low to moderate income people far more difficult to afford. The design of these policies obscures them from view, and neither policymakers nor the media do much to reveal them to the public. They are also shrouded by the fact that they are not part of the regular budget process: they face fewer hurdles in being enacted in Congress than regular spending programs, and once in place, they operate essentially on "autopilot." Even if they grow into large entitlements, like the ones mentioned above, policymakers are never obligated to revisit the question of their value or costs.
As the supercommittee looks for how to proceed, reducing tax breaks—at the very least, curtailing their bias toward the wealthy—could go far to improve the nation's balance sheet and to reduce inequality.

When I was a renter, I didn't think this deduction was fair. Now I am sort of attached to it, but if taxes need to go up -- and they do -- this is one way to do it.

links for 2011-11-01

Posted: 01 Nov 2011 12:06 AM PDT

"Did The European Deal Just Collapse?"

Posted: 31 Oct 2011 02:43 PM PDT

Tim Duy:

Did The European Deal Just Collapse?, by Tim Duy: To be sure, I have been bearish on Europe. From last week:

I remain something of a Euroskeptic at this point. At best, I think the Europeans will be kicking the can down the road for a few months.

It turns out a "few months" might have been wildly optimistic. It was quickly evident that bond markets didn't show the same enthusiasm equity markets expressed for the supposed deal. That was huge red flag. The second red flag was the Bank of Spain announcing a stagnant 3Q GDP. From the Associated Press:

The Bank of Spain suggested that the flat growth calls into question the government's goal of reducing its deficit to 6 percent of GDP in 2011, from 9.2 percent last year...

...It said domestic demand fell because of lower government spending as a result of deficit-reducing austerity measures taken by regional governments and because of a moribund real estate market. Household and business spending posted small increases. Spain's economic woes stem largely from the collapse of a property bubble.

The Bank of Spain said there is still time to meet the deficit reduction target by the year's end but warned that fresh measures may be necessary.

Yes, you read that right...the Bank of Spain blamed missing deficit reduction targets on fiscal austerity and then suggests additional fiscal austerity as the solution. And as all nations in the Eurozone increasingly pursue fiscal austerity, we can only expect the nascent European recession to deepen. Eventually, the European public will have had enough of the downward spiral. How long will it be before Spain decides to aggressively push for a Greece solution of "voluntary" debt relief?

Finally, a lynchpin in the European debt deal - Greece - apparently isn't ready to abide by the terms of that deal. The public pressure is now too much. From the Financial Times:

Greece's prime minister unexpectedly announced a referendum to approve a second EU bail-out deal for his austerity-hit country, less than a week after it was agreed with international creditors at a European Union summit...

...One senior EU official told the Financial Times that Mr Papandreou had appeared reticent about the components of the bail-out package during talks at last week's summit of EU presidents and prime ministers but no one was prepared for the referendum announcement that came "like a bolt out of the blue...

...The vote would probably be held in January, when Greek bondholders were expected to sign up for a voluntary 50 per cent haircut being negotiated with the International Institute of Finance, wrapping up the new bail-out package. One Athens banker said: "This is a worrying decision by the prime minister. It could derail the whole process even before it's properly started."

Not only are the details of the grand European plan still in flux, but so are the broad brushstrokes! Clearly, the Greeks have just brought back into play all the uncertainty last week's summit was meant to dispel. It is not unreasonable to think the Greek electorate is more willing to technically default and start from scratch than their leaders. Indeed, shouldn't this be our baseline scenario?

Bottom Line: Last week's European Summit accomplished far less than even the reduced expectations going into last week. The cracks began appearing before the ink was dry. More worrisome is that the Greek leadership didn't even believe they were on board in the first place. Simply put, the world economy is no less fragile than it was a week ago. And in that fragility still lies the recession risk for a still struggling US economy.

DeLong: The ECB’s Battle against Central Banking

Posted: 31 Oct 2011 09:45 AM PDT

Brad DeLong tells the ECB to start acting like a central bank:

The ECB's Battle against Central Banking, by Brad DeLong, Commentary, Project Syndicate: ...The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has "only one needle on [its] compass, and that is inflation." ...
Perhaps the most astonishing thing about the ECB's monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition. ...

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