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March 13, 2012

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Posted: 13 Mar 2012 12:45 AM PDT
What I think the Fed should do:
Can the Doves Cage the Hawks?
Why does overshooting the inflation target in the short-run induce such fear in so many members of the Fed's monetary policy committee?
Posted: 13 Mar 2012 12:11 AM PDT
Another reminder that Republican politicians are citing tax figures that are a very misleading indicator of the overall tax burden that various income groups face:
The Myth of the Non-Paying 47 Percent, CBPP: The argument that we should raise taxes on the bottom half of households because too many of them don't owe federal income tax doesn't take the tax system as a whole into account, our former colleague Aviva Aron-Dine explains in a new piece in the Milken Institute Review. Here's an excerpt:
These are tough times, especially for low- and moderate-income families. For much of 2011, the unemployment rate exceeded 9 percent, and was higher among those without a college education. Last year, 15 percent of Americans lived in poverty, up from 12 percent before the recession. Meanwhile, the median income of working-age households fell sharply for the third year in a row. And that decline came on top of more than three decades of sluggish growth for all but the highest earners.
Yet to hear some people tell it, one of the major problems facing America is that the bottom half of U.S. families is getting off too easy. Every major candidate in the Republican presidential race, along with the Republican congressional leadership, has expressed outrage over the fact that 47 percent of households didn't owe any federal income tax in 2009. …
But the picture changes dramatically once other federal taxes are included. When all federal taxes are taken into account, even the lowest fifth of households (with average incomes of about $18,000) pay 4 percent of income in federal taxes, while the second-lowest fifth (average income: $43,000) pay 11 percent. ...
State and local tax systems are typically quite regressive... When state and local taxes are taken into account along with federal taxes, the poorest fifth of households pays about 15 percent of income in taxes; the next fifth pays about 21 percent.
These figures give the lie to the idea that there is a large class of Americans who "don't pay taxes." To the contrary, they show that the federal income tax is one of the few taxes that doesn't impose higher burdens on low- and moderate-income households than on upper income ones. The overall U.S. tax system is progressive only because the federal income tax is very progressive. Put differently, we've chosen to concentrate almost all of the system's progressivity in the Federal income tax. ...
The percentage of people who didn't pay federal taxes in 2009 was also elevated due to the recession, so even in isolation this figure distorts the picture relative to more normal times.
Posted: 13 Mar 2012 12:06 AM PDT
Posted: 12 Mar 2012 01:39 PM PDT
Joe Stiglitz:
The US labour market is still a shambles, by Joseph Stiglitz, Commentary, Financial Times: It is understandable, given the number of times green shoots have been seen since the downturn began in December 2007, that there might be some skepticism about claims the recovery is finally under way. To me the question is what does it imply for policy? Does it mean we can be more relaxed about the demands for budget cuts emanating from fiscal conservatives? Or that the US Federal Reserve should start paying more attention to inflation, and begin contemplating raising interest rates? Even if this is not one of the many green shoots that soon turn brown, the economy will almost certainly need more stimulus if it is to return to full employment any time soon.
This is the inevitable conclusion from looking at the state of the labour market today. It is a shambles. ...
Today the American economy faces three big risks. First, a steeper European downturn, as a result of the excessive austerity and the euro crisis. Second, complacency that the economy will recover quickly without government support. Though every downturn comes to an end, that should not be of much comfort. Third, that we accept that an unemployment rate above 7 per cent is inevitable.
If my Cassandra forecast turns out to be wrong, stimulus can be cut. But if it turns out to be right, and we do too little, we will live to regret it.
I hope you know by now that I agree.
Posted: 12 Mar 2012 12:55 PM PDT
Barry Eichengreen says lack of trust is standing in the way of European reforms:
Europe's Trust Deficit, by Barry Eichengreen, Commentary, Project Syndicate: There is no shortage of talk nowadays about Europe's deficits and the need to correct them. ... But ... the deficit that really matters. ... is a deficit of trust.
First, there is deficient trust between national leaders and their publics. We saw this most visibly in the person of former Italian Prime Minister Silvio Berlusconi... But even the most stalwart European leaders have lost their followers' trust by baldly saying one thing today and the opposite tomorrow. ....
Second, there is a lack of trust among European Union member states. ...
Third, there is lack of trust among the social groups called on to make sacrifices. ...
In other words, lack of social trust blocks structural reform. The Greek version of this dilemma, in which no one pays taxes because no one else pays taxes, is particularly stark.
Survey research has revealed that societies vary greatly in their levels of trust. Economists, for their part, have shown that these different attitudes have deep historical roots. ... Evidently, attitudes are passed down through the generations. They are embedded in societies in the form of culture. Simply put, when it comes to trust, history casts a long shadow.
Historians have long emphasized the importance of such "path dependence" – that events in the distant past continue to shape outcomes in the present. Yet they also point to exceptional windows in time when it is possible for societies to shift away from their established paths. A crisis, when the viability of established arrangements is called into question, is just such a window.
The euro crisis thus offers Europe an opportunity to reestablish trust. Its national leaders need to reestablish the trust of their constituents by offering them straight talk. EU member states need to rebuild their trust in one another. And European countries facing the need for wrenching structural reforms need to restore social trust at home.
If this opportunity to rebuild trust is squandered, it will be difficult, if not impossible, for Europe to address its fiscal, economic, and institutional deficits.

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