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October 1, 2012

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Paul Krugman: The Real Referendum

Posted: 01 Oct 2012 12:33 AM PDT

If Obama wins, will he betray the "clear mandate for preserving and extending" the social insurance system that voters will have given to him?:

The Real Referendum, by Paul Krugman, Commentary, NY Times: Republicans came into this campaign believing that it would be a referendum on President Obama, and that still-high unemployment would hand them victory on a silver platter. But given the usual caveats — a month can be a long time in politics... — it doesn't seem to be turning out that way.
Yet there is a sense in which the election is indeed a referendum... Voters are, in effect, being asked to deliver a verdict on the legacy of the New Deal and the Great Society, on Social Security, Medicare and, yes, Obamacare...
If the polls are any indication, the result of that referendum will be a clear reassertion of support for the safety net, and a clear rejection of politicians who want to return us to the Gilded Age. But here's the question: Will that election result be honored?
I ask that question because we already know what Mr. Obama will face if re-elected: a clamor from Beltway insiders demanding that he immediately return to his failed political strategy of 2011, in which he made a Grand Bargain over the budget deficit his overriding priority. Now is the time, he'll be told, to fix America's entitlement problem once and for all. There will be calls ... for him to officially endorse Simpson-Bowles...
And Mr. Obama should just say no,... the fact is that Simpson-Bowles is a really bad plan, one that would undermine some key pieces of our safety net. And if a re-elected president were to endorse it, he would be betraying the trust of the voters who returned him to office. ...
Now, there's no mystery about why Simpson-Bowles looks the way it does. It was put together in a political environment in which progressives, and even supporters of the safety net as we know it, were very much on the defensive — an environment in which conservatives were presumed to be in the ascendant, and in which bipartisanship was effectively defined as the effort to broker deals between the center-right and the hard right.
Barring an upset, however, that environment will come to an end on Nov. 6. This election is, as I said, shaping up as a referendum on our social insurance system, and it looks as if Mr. Obama will emerge with a clear mandate for preserving and extending that system. It would be a terrible mistake, both politically and for the nation's future, for him to let himself be talked into snatching defeat from the jaws of victory.

Fed Watch: If QE Causes Commodity Price Inflation...

Posted: 01 Oct 2012 12:24 AM PDT

Tim Duy:

If QE Causes Commodity Price Inflation..., by Tim Duy: If QE causes commodity price inflation, what caused commodity prices to rise before QE? It never ceases to amaze me that critics of quantitative easing fail to remember that commodity prices were rising well before the Federal Reserve engaged in quantitative easing:

Commodity

If anything, commodity prices have been moving generally sideways since the Fed began expanding its balance sheet:

Fed

And please don't say "commodity prices have surged since the beginning of 2009." I think it is pretty obvious that virtually everyone would not want to return to the economic conditions of 2009 to achieve lower commodity prices. The rebound of commodity prices was a natural consequence of expanding global activity; if QE is to blame, it must also be blamed for the economic rebound. Also, why have headline consumer prices grown more slowly since the Fed initiated quantitative easing?

Pcepath

What about the surging inflation expectations in the TIPS markets (not necessarily the best measures of inflation expectations, and the ones already falling anyway)?

Infexplong

At best, quantitative easing is keeping inflation expectations propped up, barely. And once again, does anyone really want to return to the collapsing inflation expectations at the height of the recession? And are expectations any higher than before quantitative easing? No.
Bottom Line: If anything, inflation is lower, both for commodity prices and headline PCE, after quantitative easing. So isn't it finally time to put to rest the myth that quantitative easing is causing runaway inflation? Nothing to see here folks, move along.

Links for 10-01-2012

Posted: 01 Oct 2012 12:06 AM PDT

'Will American Innovation Slow If We Go 'Cuddly'?'

Posted: 30 Sep 2012 10:33 AM PDT

I hope you read the post by Lane Kenworthy in today's list of links, but let me highlight one section in particular (there's quite a bit more in the full post):

Will everyone be worse off if the United States turns social democratic? by Lane Kenworthy: Daron Acemoglu, James Robinson, and Thierry Verdier have a new paper that asks "Can't We All Be More Like Scandinavians?" Their answer is no. The answer follows from a model they develop...
Acemoglu, Robinson, and Verdier say the model might help us understand patterns of economic growth and well-being in the United States and the Nordic countries — Denmark, Finland, Norway, and Sweden. The United States chose cutthroat capitalism, while the Nordics chose cuddly capitalism. The U.S. grew faster for a short time, but since then all five countries have grown at the roughly same pace. America's high inequality encourages innovation. The Nordics can be cuddly and still grow rapidly because of technological spillover. If the U.S. were to decide to go cuddly, innovation would slow. Both sets of nations would grow less rapidly. ...
Will American innovation slow if we go "cuddly"?
The really interesting question posed by Acemoglu, Robinson, and Verdier is whether innovation would slow in the United States if we strengthened our safety net and/or reduced the relative financial payoff to entrepreneurial success. I'm skeptical, for three reasons.
The first flows from America's past experience. According to Acemoglu et al's logic, incentives for innovation in the U.S. were weakest in the 1960s and 1970s. In 1960 the top 1%'s share of pretax income had been falling steadily for several decades and had nearly reached its low point. Government spending, meanwhile, had been rising steadily and was close to its peak level. Yet there was plenty of innovation in the 1960s and 1970s, including notable advances in computers, medical technology, and others.
Second, the Nordic countries, with their low income inequality and generous safety nets, currently are among the world's most innovative countries. The World Economic Forum's Global Competitiveness Index has consistently ranked them close to the United States in innovation. The most recent report, for 2012-13, rates Sweden as the world's most innovative nation, followed by Finland. The U.S. ranks sixth. The 2012 WIPO-Insead Global Innovation Index ranks Sweden second and the United States tenth. Whether or not this lasts, it suggests reason to doubt that modest inequality and generous cushions are significant obstacles to innovation.
Third, if Acemoglu and colleagues are correct about the value of financial incentives in spurring innovation, we should see this reflected not only in the United States but also in other nations with relatively high income inequality and low-to-moderate government spending, such as Australia, Canada, Ireland, New Zealand, and the United Kingdom. But we don't. ...
There's one additional possibility worth considering. If financial incentives truly are critical for spurring innovation, it could be the opportunity for large gains that matters, rather than the absence of cushions. Suppose we were to increase government revenues in the United States via higher taxes on everyone — steeper income taxes on the top 1% or 5% plus a new national consumption tax. And imagine we used those revenues to expand public insurance and services — fully universal health insurance, universal early education, a beefed-up Earned Income Tax Credit, a new wage insurance program, more individualized assistance with training and job placement. These changes wouldn't alter income inequality much, but they would enhance economic security and opportunity. Would innovation decline? I doubt it. ...

An enhanced safety net -- a backup if things go wrong -- can give people the security they need to take a chance on pursuing an innovative idea that might die otherwise, or opening a small business. So it may be that an expanded social safety net encourages innovation.

As for the effect of reducing the financial payoff by raising taxes on high incomes to support an expansion in th esafety net, I don't think it's any secret that I think the distribution of income in recent decades has pushed too much income toward the top and too little toward the middle and bottom (relative to changes in productivity). That is, the distribution of income is distorted. To the extent that taxing high incomes removes these distortions, it's helpful rather than harmful.

And there must be diminishing returns to incentives in any case. If we take away $50 million in taxes leaving someone the prospect of earning "only" $100 million in net profit (i.e. taxes are 33%), would the person really decide to give up the project? Would someone really decide it isn't worth it to only earn $100 million and work less or give it up altogether? Or is it the case that by the time you get to that much income, a marginal increase of decrease in profit has almost no effect on incentives? I'd guess that's the case (and for those in the game simply to see who can accumulate the most, so long as the rules are the same for all, incentives won't change either). There could be an effect at the margin, i.e. profitable projects become unprofitable due to the increase in the tax rate, and that could impact innovation and growth. But growth doesn't seem to decline when taxes at the top are higher, so this case is hard to make.

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