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March 28, 2014

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Posted: 28 Mar 2014 12:06 AM PDT

Paul Krugman: America’s Taxation Tradition

Posted: 28 Mar 2014 12:06 AM PDT

"Confiscatory taxation" was an "American invention":

America's Taxation Tradition, by Paul Krugman, Commentary, NY Times: ...Some conservatives argue that focusing on inequality is ... un-American — that we've always celebrated those who achieve wealth...
And they're right. No true American would say this: "The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power," and follow that statement with a call for "a graduated inheritance tax on big fortunes ... increasing rapidly in amount with the size of the estate." 
Who was this left-winger? Theodore Roosevelt, in ... 1910...
The truth is that, in the early 20th century, many leading Americans warned about the dangers of extreme wealth concentration, and urged that tax policy be used to limit the growth of great fortunes. Here's another example: In 1919, the great economist Irving Fisher ... devoted his presidential address to the American Economic Association largely to warning against the effects of "an undemocratic distribution of wealth." And he spoke favorably of proposals to limit inherited wealth through heavy taxation of estates.
Nor was the notion of limiting the concentration of wealth, especially inherited wealth, just talk..., "confiscatory taxation of excessive incomes" — that is, taxation ... to reduce income and wealth disparities, rather than to raise money — was an "American invention."...
Back when Teddy Roosevelt gave his speech, many thoughtful Americans realized ... that the New World was at risk of turning into Old Europe. And they were forthright in arguing that public policy should seek to limit inequality for political as well as economic reasons, that great wealth posed a danger to democracy. ...
You sometimes hear the argument that concentrated wealth is no longer an important issue... But ...... the share of wealth held at the very top ... has doubled since the 1980s, and is now as high as it was when Teddy Roosevelt and Irving Fisher issued their warnings. ...
We aren't yet a society with a hereditary aristocracy of wealth, but, if nothing changes, we'll become that kind of society over the next couple of decades.
In short, the demonization of anyone who talks about the dangers of concentrated wealth is based on a misreading of both the past and the present. Such talk isn't un-American; it's very much in the American tradition. And it's not at all irrelevant to the modern world. So who will be this generation's Teddy Roosevelt?

'The Misuse of Theoretical Models in Finance and Economics'

Posted: 27 Mar 2014 11:18 AM PDT

 Stanford University's Paul Pfleiderer:

Chameleons: The Misuse of Theoretical Models in Finance and Economics, by Paul Pfleiderer, March 2014: Abstract In this essay I discuss how theoretical models in finance and economics are used in ways that make them "chameleons" and how chameleons devalue the intellectual currency and muddy policy debates. A model becomes a chameleon when it is built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy. I discuss how chameleons are created and nurtured by the mistaken notion that one should not judge a model by its assumptions, by the unfounded argument that models should have equal standing until definitive empirical tests are conducted, and by misplaced appeals to "as-if" arguments, mathematical elegance, subtlety, references to assumptions that are "standard in the literature," and the need for tractability.

'Nafta Still Bedevils Unions'

Posted: 27 Mar 2014 10:07 AM PDT

I still believe international trade makes us better off on net, but there are winners and losers from these agreements and we don't do anywhere near enough to help those who are hurt by these deals -- no wonder they are opposed:

Nafta Still Bedevils Unions, by Annie Lowrey, NY Times: Two decades after its enactment, the North American Free Trade Agreement — better known as Nafta — remains a source of deep disagreement among economists.
Maybe it has led employers to add tens of thousands of jobs. Or perhaps it has caused the loss of 700,000 jobs. Maybe it has been "a bonanza for U.S. farmers and ranchers," as the United States Chamber of Commerce has said. But perhaps it has depressed wages for millions of working families. Then again, maybe all sides are wrong: "Nafta brought neither the huge gains its proponents promised nor the dramatic losses its adversaries warned of," wrote Jorge G. Castañeda in an essay for Foreign Affairs this winter. "Everything else is debatable."
But for labor groups, there is no debate: Nafta hurt American jobs and household earnings. And the sweeping trade agreement cast a shadow that persists today, spurring deep skepticism of the major trade deals the Obama administration is negotiating with Europe and a dozen Pacific Rim countries. ...
On Thursday, the A.F.L.-C.I.O. released a report excoriating Nafta... Among its conclusions: That Nafta increased corporate profits while depressing wages; that its labor-protection provisions have not improved labor conditions on the ground; that its environmental standards have not protected the environment; and that higher trade flows have not meant shared prosperity. ...

'Why the Income Distribution Matters for Macroeconomics'

Posted: 27 Mar 2014 10:07 AM PDT

Atif Mian and Amir Sufi:

Why the Income Distribution Matters for Macroeconomics, by Atif Mian and Amir Sufi: A central argument we have made on this blog and in our book is that the distribution of income/wealth matters a great deal for thinking about the macro-economy. Convincing some of this fact is not easy...
Perhaps the easiest way to see the importance of the income distribution is to examine how households respond to a windfall of cash or wealth. Do they spend the money, or do they save it? And does the spending response to a windfall of cash depend on the income of the household?
The answer is a resounding yes: low income households spend a much higher fraction of cash windfalls than high income households. In the parlance of economics, low income households have a much higher marginal propensity to consume, or MPC, than high income households.
This is one of the most well-established facts in empirical research in macroeconomics. Here is a summary: ...[reviews evidence]...
The implications of the differences in spending propensities across the population are enormous, especially if we believe that inadequate demand explains economic weakness during severe recessions. For example, facilitating debt forgiveness or progressive fiscal stimulus rebates will likely boost spending during the most severe part of a recession.
But perhaps even more interesting are the implications for the secular stagnation hypothesis, which holds that we are in a long-run stagnating economy because of inadequate demand. Is it a coincidence that the secular stagnation hypothesis is being revived exactly when income inequality is accelerating? If a higher share of income goes to the wealthiest households who spend very little of it, then perhaps these two trends are closely related.

'Redistribution is ... as American as Apple Pie'

Posted: 27 Mar 2014 09:09 AM PDT

Paul Krugman:

What America Isn't, Or Anyway Wasn't: ...one point Piketty makes is that the modern notion that redistribution and "penalizing success" is un- and anti-American is completely at odds with our country's actual history. ... America actually pioneered very high taxes on the rich...
Why...? Piketty points to the American egalitarian ideal, which went along with fear of creating a hereditary aristocracy. High taxes, especially on estates, were motivated in part by "fear of coming to resemble Old Europe." Among those who called for high estate taxation on social and political grounds was the great economist Irving Fisher.
Just to reemphasize the point: during the Progressive Era, it was commonplace and widely accepted to support high taxes on the rich specifically in order to keep the rich from getting richer — a position that few people in politics today would dare espouse.
...redistribution is ... as American as apple pie.

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