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November 28, 2012

Latest Posts from Economist's View


Latest Posts from Economist's View


'No Reason for Conservatives to Back Away from their Absolutist Anti-Tax Stance'

Posted: 15 Nov 2012 12:33 AM PST

Is James Kwak correct?:

...if you take the long view, there's no reason for conservatives to back away from their absolutist anti-tax stance. So they lose an election or two. What happens? When it comes to taxes, Democratic majorities at best hold the line against further tax cuts. After their sweep in 2008, President Obama and his congressional allies passed a couple of modest tax increases to pay for Obamacare (and one of those, the excise tax on Cadillac plans, is one that conservative economists profess to like), but also extended the Bush tax cuts and added a few more tax cuts of their own; now Obama wants to make more than 80 percent of the Bush tax cuts permanent, and last summer he offered up his own proposals for entitlement cuts. When the Republicans return to power, as they inevitably will, they can just pick up where they left off..., for the last eighteen years, the hardline anti-tax position has been a huge winner for Republicans. Given that Democrats have shown exactly zero ability to punish them for it, I can't see any reason why they should change their ways now.
If there is some sort of compromise in the next couple of months, it's going to be one that Republicans can frame as a tax cut, not an out-and-out violation of the Grover pledge; one scenario is that the year ends with no deal, tax rates go up, and then Obama and the Republicans agree to cut them. ...
Republicans may object to tax rate increases, and no doubt will, but for once I'm not sure they'll prevail.

'Manufacturing Fetishism'

Posted: 15 Nov 2012 12:24 AM PST

John Kay:

Fetish for making things ignores real work, by John Kay, Commentary, Financial Times: ...The ... iPhone ... sells, in the absence of carrier subsidy, for about $700. Purchased components ... may account for as much as $200 of this. ... "Assembled in China" costs about $20. The balance represents the return to "designed in California", which is why Apple is such a profitable company.
Manufacturing fetishism – the idea that manufacturing is the central economic activity and everything else is somehow subordinate – is deeply ingrained in human thinking..., probably formed in the days when economic activity was the constant search for food, fuel and shelter. ...
Most of what you pay reflects the style of the suit, the design of the iPhone,... the painstaking pharmaceutical research... Physical labor incorporated in manufactured goods is a cheap commodity in a globalised world. ... 
Manufacturing was once a principal source of low-skilled employment but this can no longer be true in advanced economies. Most unskilled jobs in developed countries are necessarily in personal services. Workers in China can assemble your iPhone but they cannot serve you lunch, collect your refuse or bathe your grandmother. Anyone who thinks these are not "real jobs" does not understand the labor they involve. ...
Where will exports come from, they ask? From exporting "designed in California" or "tailored in Savile Row." Ask Apple, or your tailor, how they derive their earnings.

Links for 11-15-2012

Posted: 15 Nov 2012 12:06 AM PST

Carbon Taxes and the National Debt

Posted: 14 Nov 2012 01:47 PM PST

I am hearing a lot lately about using a carbon tax to fill the budget gap. I'm all for a carbon tax, internalizing externalities so that these markets work better is a good idea if we can somehow get through the political barriers, but we shouldn't be overly optimistic about how much revenue such a tax will bring.

In order to get support for such a tax and to implement it equitably, some groups will need to be compensated for the higher energy costs they will face. For example, these proposals often come with a proposal to return some of the tax as a lump-sum payment to lower income households (the microeconomics of a tax on carbon combined with lump-sum payments can be found here). Presumably, the higher the threshold for "low income," the easier it will be to get support for a carbon tax proposal, so there will be pressure for the compensation to extend, perhaps on a sliding scale, to middle class households.

And, at least in the initial years, there are other groups that will likely need to be compensated (okay, bought off) in order to garner the necessary political support.

All of these attempts to insulate various groups from the consequences of the tax (through fancy schemes that retain te incentive to save energy) will eat into potential revenue, and the fact that the response to the tax will be greater as more time passes -- for example as people switch to more efficient cars and appliances -- will also reduce revenue (this is not a problem in a larger sense, such substitutions are the whole point of the tax, but it does reduce the revenue).

Overall, the point is a simple one: don't overestimate the revenue from a carbon tax.

The Costs and Benefits of Raising the Retirement Age

Posted: 14 Nov 2012 11:49 AM PST

The proposal to raise the retirement age for Social Security (as opposed to, say, raising the payroll cap) is sure to come up during budget negotiations. It always does, and already has. Here's a very old post (from 2005, with a few minor changes) on that topic:

A recent article claims that raising the retirement age is the most obvious solution to solvency problems for Social Security. While I don't agree with the doomsayers on the solvency issue, it is still worthwhile to look at the costs and benefits of such a proposal. ...
Is raising the retirement the most obvious solution? There are two benefits with respect to solvency. Because people work longer, raising the retirement age increases revenues coming into the Social Security system. Second, because people retire later, the payout to retirees falls.   
But what are the costs?
1. An increase in life expectancy does not necessarily imply that people are healthier at age 65 or 70 than before. Suppose, for example, that medical advances are discovered that extend the end of life by several years, but have no effect on health prior to the last few years of life. In such a case there would be an increase in life expectancy, but no increase in the health of workers at the age of retirement. If people aren't healthier, then increasing the retirement age imposes a hardship over and above that faced by current retirees.
2. It's already difficult for elderly workers to find employment, and when they do they are often underemployed relative to their skill levels. Raising the retirement age will make this worse.
3. What about workers employed in physically demanding occupations? Is it reasonable to ask them to work until, say, age 72? If not, how equitable is it to have some workers work until 72, and others allowed to retire at a younger age depending on their occupation?
4. Will this distort occupational choice decisions? Will workers, especially those who are seeking work in the years close to retirement, choose strenuous jobs in order to be allowed to retire earlier? How will we decide when a worker is unable to work due to reasons associated with age?
5. The life expectancy of some groups of workers is lower than for others. If poorer workers die younger than richer workers on average, and they do, then raising the retirement age will have a larger impact on low income workers and thus, in essence, be regressive.
Do the benefits exceed the costs? I don't think so. ...

A comparison of the costs and benefits or raising the payroll cap -- which mostly affects the well-off (hence their continued push of other alternatives that shift the costs elsewhere) -- leads to a different conclusion, at least for me.

[Update: I don't get it either when looking just at the numbers, but looking at it through an ideological lens explains the desire to make people believe that Social Security is in serious trouble, and hence in need of serious cuts. Starve the Beast through tax cuts or deception, it doesn't matter, the point is to reduce the government's provision of social insurance by whatever means gets the job done.]

'The New Poverty Measure is Out, and It’s Grim'

Posted: 14 Nov 2012 11:32 AM PST

Dylan Mathews on the Census Bureau's "supplementary poverty measure," which is intended to overcome some of the shortcomings of the traditional measure of poverty:

The new poverty measure is out, and it's grim, by Dylan Matthews: ...In recent years the Census Bureau has begun developing a "supplemental poverty measure"... Today, it released the supplemental figure for 2011. Overall, it's higher than the official measure, at 16.1 percent, but for some groups, such as children under 18 and blacks, it's actually lower. By contrast, it's much higher for the elderly (15.1 percent in the supplemental measure, 8.7 percent in the official one)...
Perhaps the most interesting part of the report is the Census' measurement of how much various government programs and categories of expenses reduce or increase the supplemental poverty rate, which unlike the official rate, the supplemental measure takes into account. Medical expenses are the main expense contributor to poverty, followed by expenses related to work (such as transportation, supplies, etc.), while Social Security is far and away the most important program for reducing poverty, followed by tax credits like the Earned Income Tax Credit (EITC) or the child tax credit (CTC):

Poverty1

...the Social Security number is especially notable given how much higher the supplemental measure is than the official one for the elderly. It suggests that even with that substantial safety net, the poverty problem among the elderly is much bigger than we thought.

More on Broadening the Base versus Raising Tax Rates

Posted: 14 Nov 2012 09:58 AM PST

The Democracy in America blog at The Economist responds to recent posturing on taxes by Glenn Hubbard and John Boehner:

Elections have consequences, redux, by M.S.: We are told that in the aftermath of Barack Obama's re-election, both he and the Republican leadership in Congress are signaling a willingness to compromise in order to avoid going over the dread fiscal cliff. " ... In terms of Republican conciliation, they are referring to statements like this one by John Boehner, the speaker of the House, and articles like this one by Glenn Hubbard, formerly Mitt Romney's chief economic adviser...
Do these, in fact, represent proposals for compromise? ... It seems to me that Mr Hubbard has a fundamental and difficult realization ... to make, to wit, that the candidate he supported lost the presidential election. The proposals he embraces here, like those outlined by Mr Boehner, were advanced by Mr Romney during the presidential campaign. Mr Romney argued that any increases in revenues ought to come from the elimination of tax exemptions, rather than from hikes in the top marginal tax rate. And like Mr Boehner, he wanted plans for reducing the deficit to somehow lead to tax rates that are lower, rather than higher. Neither Mr Boehner nor Mr Hubbard has signaled any willingness to accept higher revenues from any source...
Barack Obama won the presidential election running on an explicit platform of hiking the top marginal income-tax rate... Americans want the wealthy to pay a higher tax rate. ... Republicans appear to think that by merely stating that they are not in principle opposed to the federal government getting more revenue, they are entitled to be congratulated for their conciliatory approach, despite the fact that they continue to make the same basic tax proposals they made before the election, which they lost...
What we're seeing here, in sum, isn't compromise; it's posturing. Republicans are trying to define the press and public's view of what counts as a compromise, by reiterating their existing positions as if they constituted concessions. ... But the idea that Democrats will accept the implementation by Barack Obama of Mitt Romney's economic philosophy is ridiculous. ...
I hope it's "ridiculous" to think Obama will acquiesce to these demands as part of a compromise, but I wouldn't be posting so much on this topic if I was sure.

Broadening the Base versus Raising Tax Rates

Posted: 14 Nov 2012 09:03 AM PST

Robert Reich:

The Difference Between "Broadening the Tax Base" and Raising Taxes on the Rich, by Robert Reich: The President says he wants $1.6 trillion in tax hikes. Republicans say they won't raise tax rates but might be willing to close some loopholes and limit some deductions and tax credits. Is compromise in the air?
Not a chance. True enough, such "base broadening," as Republicans like to call it, could conceivably generate $1.6 trillion in additional tax revenues over the next decade.
But, wait. Didn't the President just win a second term? The major issue decided in last week's election was that the rich should pay more. So, presumably, that $1.6 trillion should come out of the pockets of the wealthiest Americans.
"Broadening the base" has nothing whatever to do with the rich paying more. That's because a lot of tax credits and deductions help the middle class and the poor. ...
If Republicans won't budge on raising tax rates but insist on broadening the base, Democrats should take aim at the biggest tax loophole of all for America's wealthy: the preference for capital gains.
Capital gains are now taxed at only 15 percent (the major reason Mitt Romney pays a rate of under 14 percent on over $20 million of annual income). Capital gains should be taxed the same as ordinary income. That way, under a progressive tax system, the wealthy would pay far more — on the way to $1.6 trillion.

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