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November 28, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Pointing Toward Prosperity?

Posted: 26 Oct 2012 12:25 AM PDT

Obama's economic plan is nothing to get overly excited about, but it's still a lot better than Romney's:

Pointing Toward Prosperity?, by Paul Krugman, Commentary, NY Times: Mitt Romney has been barnstorming the country, telling voters that he has a five-point plan to restore prosperity. And some voters, alas, seem to believe what he's saying. So President Obama has now responded with his own plan, a little blue booklet containing 27 policy proposals. How do these two plans stack up?
Well, as I've said before, Mr. Romney's "plan" is a sham. It's a list of things he claims will happen, with no description of the policies he would follow to make those things happen. "We will cut the deficit and put America on track to a balanced budget," he declares, but he refuses to specify which tax loopholes he would close to offset his $5 trillion in tax cuts.
Actually, if describing what you want to see happen without providing any specific policies to get us there constitutes a "plan," I can easily come up with a one-point plan that trumps Mr. Romney any day. Here it is: Every American will have a good job with good wages. Also, a blissfully happy marriage. And a pony.
So Mr. Romney is faking it. ... But what about the man he wants to kick out of the White House?
Well, Mr. Obama's booklet comes a lot closer to being an actual plan. ... So, is Mr. Obama offering an inspiring vision for economic recovery? No... His economic agenda is relatively small-bore...
But a slow job is better than a snow job. Mr. Obama may not be as bold as we'd like, but he isn't actively misleading voters the way Mr. Romney is. Furthermore, if we ask what Mr. Romney would probably do in practice, including sharp cuts in programs that aid the less well-off and the imposition of hard-money orthodoxy on the Federal Reserve, it looks like a program that might well derail the recovery and send us back into recession.
And you should never forget the broader policy context. Mr. Obama may not have an exciting economic plan, but, if he is re-elected, he will get to implement a health reform that is the biggest improvement in America's safety net since Medicare. Mr. Romney doesn't have an economic plan at all, but he is determined not just to repeal Obamacare but to impose savage cuts in Medicaid. So never mind all those bullet points. Think instead about the 45 million Americans who either will or won't receive essential health care, depending on who wins on Nov. 6.

'Support the undeserving poor'

Posted: 26 Oct 2012 12:15 AM PDT

Chris Dillow says he's surprised a libertarian would even ask this question

Murrary Rothbard asks:

Why won't the left acknowledge the difference between deserving poor and undeserving poor. Why support the feckless, lazy & irresponsible?

I'd answer thusly ...

Links for 10-26-2012

Posted: 26 Oct 2012 12:06 AM PDT

DeLong: Our Debt to Stalingrad

Posted: 25 Oct 2012 10:08 AM PDT

Travel day for me today -- one more quick post before heading to the airport:

Our Debt to Stalingrad, by Brad DeLong, Commentary, Project Syndicate: We are not newly created, innocent, rational, and reasonable beings. We are not created fresh in an unmarked Eden under a new sun. We are, instead, the products of hundreds of millions of years of myopic evolution, and thousands of years of unwritten and then recorded history. Our past has built up layer upon layer of instincts, propensities, habits of thought, patterns of interaction, and material resources.
On top of this historical foundation, we build our civilization. Were it not for our history, our labor would not just be in vain; it would be impossible.
And there are the crimes of human history. The horrible crimes. The unbelievable crimes. Our history grips us like a nightmare, for the crimes of the past scar the present and induce yet more crimes in the future.
And there are also the efforts to stop and undo the effects of past crimes.
So it is appropriate this month to write not about economics, but about something else. Seventy-nine years ago, Germany went mad. ...

Does Taxing the Wealthy Hurt Growth?

Posted: 25 Oct 2012 09:08 AM PDT

This is by Ethan Kaplan of the University of Maryland (via email):

Does Taxing the Wealthy Hurt Growth?, by Ethan Kaplan: What is the impact of taxation on growth? In theory, a country without taxation will have difficulty providing basic public goods such as roads and research that are fundamental for economic growth. However, many politicians and some economists argue that once basic public goods are provided for, increases in taxation have a negative impact on growth. According to this argument, this is especially true for taxes on the very wealthy, who are likely to save their income and channel that savings into entrepreneurship or other investment. Much of the argument over tax policy in the United States is focused on whether the rich should be taxed at a higher or lower rate than they are today. The argument in favor of higher rates is that income inequality is at extremely high levels and the government should focus more on redistribution and also that the rising national debt is also potentially harmful to growth. The argument against higher rates is that raising taxes on wealthy would disincentivize the people most likely to create economic growth and thus jobs. In a climate where jobs are scarce, the argument goes, this is a particularly bad economic idea.
This debate, however, is largely based on ideology rather than evidence. Unfortunately, it is quite difficult to figure out the impact of taxation on growth. Changes to the tax codes usually pass Congress when other things are happening to the economy. For example, the 1982 tax cuts, which dropped the top marginal tax rate from 69% to 50%, were passed towards the end of a large recession. Moreover, the impact of taxes on growth can change over time as the economy changes.
Nevertheless, looking at the raw correlation between top marginal tax rates and growth can be helpful for getting a rough sense of the likely impacts of higher taxation on growth. One recent paper by Pikkety, Saez, and Stantcheva looks at the correlation between top marginal tax rates and growth and finds the growth is higher when top marginal tax rates are higher. I restrict myself to the historical experience of the United States and go back to 1930. In particular, I took real chained per capita GDP growth from 1930 to the present from the Bureau of Economic Analysis' (BEA) website. The correlation over this period between the top marginal tax rate and output growth is strong and positive as can be seen below:


A rise in the top marginal tax rate from 0 to 100 percent is correlated with a rise in per capita growth of 5.85 percentage points per year. One reason that this simple correlation might overstate the impact of the marginal tax rate on growth is that the top growth years were in the early 40s when the government was spending heavily and when the country was finally recovering from the Great Depression. If we look only at the post war period (after 1946), a rise from 0 to 100 percent in the top marginal tax rate is associated with an increase of only 2.69 percentage points of growth. Moreover, the statistical significance of the relationship becomes marginal, as the p-value rises from 0.017 to 0.122. On the other hand, if we look at the time period encompassing 1960 to the present, a rise in the top rate from 0 to 100 percent is correlated with a rise in per capita growth of 3.03 percentage points of growth per year, and the relationship becomes more statistically significant (with a p-value of 0.064 percent). Finally, if we look only at the years since 1980, a rise from 0 to 100 percent in the top marginal tax rate is associated with an increase in growth of 3.87 percentage points. In this case, the relationship is statistically insignificant (with a p-value of 0.392 percent), in part because the sample size is small.
While we cannot say that there is a robust significant positive relationship between tax rates and growth, it is still interesting that regardless of when we start the sample, higher top marginal tax rates are associated with higher not lower growth. Moreover, a narrative reading of postwar US economic history leads to the same conclusion. The period of highest growth in the United States was in the post-war era when top marginal tax rates were 94% (under President Truman) and 91% (through 1963). As top marginal rates dropped, so did growth. Moreover, except for 1984, a recovery year, the highest per capita growth rates since 1980 were all in the late 1990s, after the top marginal tax rate had been increased from 28% under President Reagan to 31% under the first President Bush and then 39.6% under President Clinton. One possible reaction to this finding is that what matters more than the top marginal tax rate on income is the capital gains tax rate but growth has also been higher when the capital gains tax rate has been higher.
So, what does this tell us? Of course, it would be silly to make the argument that increasing top marginal rates from 0 to 100 percent increased per capita growth by almost 6 percentage points per year. No doubt there are other factors that could confound the relationship between tax rates and growth. However, the changes in top marginal tax rates over the period are quite large so it seems likely that if raising top marginal rates did have a large negative impact on growth, we should be able to see it in the correlations. Thus, it also seems silly to argue that higher taxes on the rich have a large negative impact on growth, given that historically growth is, if anything, positively correlated with the top marginal rate.
What does this mean for public policy? Given the large rise in inequality in the United States over the past 40 years, if the historical evidence tells us that it is unlikely that taxing the wealthy has a large negative impact on growth (and it might even have a positive impact), shouldn't we increase rates on the wealthy from their current top rates of 35%?
p.s. the data used to analyze the time series is available on my website:

Fed Watch: Still The Scariest Data

Posted: 25 Oct 2012 09:00 AM PDT

Tim Duy:

Still The Scariest Data, by Tim Duy: I tend to view the data as being modestly optimistic in that it has generally surprised on the upside of late, enough to drive away fears that the slow patch this summer would evolve into a recession in the near future. Still, the data has not been sufficiently optimistic to sway me from my general view that underlying growth continues to be slow and steady.
For example, I would like to see initial unemployment claims make another push lower to cement a stronger outlook:


That said, I remain unsettled by the core manufacturing data, which I would say is clearly in recession territory:


I think this is the scariest near-term indicator at the moment. Of course, one piece of data in no way makes a recession. I attribute the decline to three factors. First, expiring tax credits pulled some investment into 2011. Second, the drag from international weakness. Third, uncertainty about the extent of fiscal tightening in 2013. At least the second, and probably the third, of these three factors is weighing on earnings growth, which in turn has brought the bull market in equities to at least a pause. From Neil Irwin at the Washington Post:

The CEO mindset on the fiscal cliff has been evident in a spate of third-quarter earnings announcements in the past two weeks. Almost uniformly, company executives discuss the looming threat to the economy, usually offering only vague comments that it has been a drag on their confidence and that they don't know exactly what a resolution would look like....

...Some of the gloomiest assessments of economic conditions have come from companies that do extensive business overseas. By many accounts, as troubled as the U.S. economy has been in recent months, it looks better than many of its counterparts.

Yes, sad as it seems, across the globe the US is a bright spot at the moment.

Bottom Line: The core manufacturing data stands out as an aberration. While arguably a recessionary indicator, it also comes at a time of an improving housing market. It would be unusual, to say the least, to experience a recession when housing is trending up. Moreover, I remain skeptical that trade channels are sufficient to trip the economy into recession. Still, I can't discount the recession threat entirely; to do so would be ludicrous in the face of the looming fiscal cliff. On average, Congress and the Administration have tended to limp things along, and hence the median bet should be that they will continue to do so. But all bets wear thin after awhile. Assuming monetary policy remains on hold (which it will), the degree of fiscal austerity in 2013 remains my chief concern.

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