October 19, 2009 • 1:11 pm
Of course, tax policy is impossibly complex; the relationship between tax federal taxes and economic growth is difficult to pin down and subject to much debate. But even the most cursory look is enough to show that this is one of those impossible problems that actually has a simple cause and a simple solution. Compare the following.
The Times, 16 October—
At 10 percent of the gross domestic product, the 2009 deficit is the highest since the end of World War II, when it was 21.5 percent. At that level, it already has become a bigger economic and a political issue than any time since the late 1980s.
Leonhardt in the Times, 6 October—
[Bruce Bartlett's] conservatism starts with the idea that high taxes are no longer the problem, even if complaining about them still makes for good politics. This year, federal taxes are on pace to equal just 15 percent of gross domestic product. It is the lowest share since 1950.
What more do you need to know?
a.j.m.
Filed under: Domestic, Economics , Club Wagner, deficit, taxes
September 30, 2009 • 10:27 am
David Brooks’ new column is a little surreal. Lamenting the sorry state of personal and public finance in this country, Brooks pines for a time when our “country’s cultural monitors” were more interested in guiding Americans’ economic behavior than in fighting about prayer in the schools. Why “cultural monitors” should be guiding Americans’ economic behavior is not totally clear, but the conflation between the cultural and the economic pervades the piece: if we do need, as Brooks says, a “moral revival,” I’m not sure it should be aiming at a bump in the savings rate. I’m not really sure what an “economic value” is.
He’s not wrong about where we stand and that it needs fixing; I’m just saying. There’s a way to talk about these things, and I don’t like the implication that financial discipline is only an acceptable conservative issue if it’s about values. Moral decline is not the only sort of decline this country faces.
Update— You’ll never believe it. Krugman goes with “it’s not moral decay, it’s Republicans.“
a.j.m.
Filed under: Domestic, Economics , Brooks
While Adam’s right that the problem with the purported rise in fraud, conflicts of interest, bribery, etc., is basically ethical, it’s worth emphasizing the liberal response must be fundamentally economic. This isn’t just because liberal governments aren’t in the business of deciding whether it’s moral to cheat: fraud and other forms of economic cheating usually have adverse effects on social welfare. I’m not saying all questions of morality manifest themselves in material externalities, but with these particular sins the proper response should be a mix of economic incentives and, more importantly, effective regulation. It’s not the sexiest solution, but it’s the only one that keeps the state from having to arbitrate shifting standards of good behavior while minimizing the externalities of what may be unethical behavior.
UPDATE—What got buried in the heart of this post was the point I intended on making in the first place, namely, that the moral ills of graft and theft distort markets and damage the expectations of members of society. The reason to punish and regulate fraud isn’t because it’s immoral, but because fraud makes society less prosperous. Transparency and fairness are implicit goods for many of us, but they should be top priorities of policy makers because people are better off when they’re not getting stolen from.
—Brian
Filed under: Domestic, Economics, Liberalism
Of course, any country should be cautious in adopting strict regulations on a profitable financial instrument (partially because speculators will find a way to bet on anything, regardless of imposed regulation), but the Obama administration’s case for curbing oil speculators is as straightforward as any. A swing from $145/barrel over the summer to $33 in December is not the kind of volatility the government should tolerate for something as basic and crucial to the economy as oil in a recession in which credit ratings are difficult to value. There are plenty of ways to make money that are socially productive rather than socially dangerous.
The problem is that this kind of enthusiasm seems not to extend to other sectors of the economy. Since the Great Depression, the stated economic orthodoxy of this country and all other industrialized ones has been to maintain countercyclical monetary and fiscal policy–to round off the troughs and peaks of the natural economic cycle. The problem is, the United States (and most other industrialized countries) have taken to practicing half of a countercyclical policy–to round off the troughs and accelerate the peaks. In a sprint for economic growth, and bound to lobbying interests, advanced democracies have created a system almost calculated to produce bubble after bubble, crash after crash and they can’t seem to do better. If we want to keep from creating a system in which we privatize profits and socialize losses, if we want a stable and productive economy that lets the middle class lead their lives unmolested, it’s going to require rounding off the peaks of good economic times.
Curbing oil speculators is only one of a whole myriad of steps this would take. (Reforming credit rating agencies, campaign finance reform probably, developing new monetary standards, creating real clearinghouses for exotic financial derivatives from which their are no exemptions are among the others.) S0, sure, do what we can to reduce the volatility in energy markets (even though volatile energy markets mean structural reform in energy markets)–but what is really needed is renewed dedication to a basic economic doctrine, and the realization that getting a productive economy means losing some growth.
Filed under: Economics , countercycle
Every so often I’ve been checking in with the Bureau of Economic Analysis to see the updates to the above chart, and the news keeps getting better and better. As you can see, the personal savings rate has been steadily declining towards zero and is now higher than it has been in at least a decade—in fact, the rate has not been this high since 1995 (a year that hardly comes to mind when one thinks of frugality).
I’ve been watching the personal savings because it is not simply an economic marker but a sign of our national identity: are we to be obsessed with conspicuous consumption to the detriment of our future and our children’s, or can we get a handle on ourselves to let the next generation of American’s decide their own future? The answer is far from clear, but the chart above is but one reason why this recession has the potential to do much good. But, as I have written before, it is a question of whether the recession—with a crucial push from our public leaders—can instantiate enduring norms or whether Americans are simply responding elastically to economic pressures, with the changes vanishing as soon as the economy seems to return to normalcy? Can American’s learn to save again? Can they retain their enthusiasm for reforming ossified, expensive, and hurtful systems? Can they keep their attention and their purchasing decisions on large epochal problems like climate change? Is this a lasting change to American identity, or just the exigencies of the times?
There is some reason to think that the former might be true. SUV sales, for instance, have proven imperfectly elastic to gas prices, having failed to rebound to previous levels. The percentage of Ford sales that go to large SUVs is a quarter of what it was five years ago. If these changes to consumer sentiment can persist, the structural changes they precipitated will help lock them into place: plants will retool to produce smaller personal vehicles; cities will complete projects to make bicycling more attractive; research and development funds for alternative energy will begin to drive unit prices lower; political rhetoric will develop new and irrevocable commonplaces; and, hopefully, once initial political efforts have confronted issues like healthcare, they will lose their sacrosanct patina and reforms can follow reforms.
Recession mentality suits America. U.S. consumers are almost never receptive to political suggestion about their finances, but if we can draw this recession out, we might be able to create a new era of collective and personal American responsibility. (Because when was the last time you thought of this country as responsible?)
Filed under: Economics, Who We Are, sustainability , cascades, responsibility, savings rate
What started an interesting idea has reared it’s head: a provision to establish tariffs on certain energy-intensive goods from countries that have not accepted emissions limits has found its way into the omnibus energy bill that Obama has to sign. Previously, I argued that if there were some way to differentiate the protectionist signal from the environmental one, the idea might be a useful way to gain some desperately needed leverage on these countries. If the tariffs were established by an international organization or enshrined in an environmental treaty, it would essentially do globally what countries are attempting to do domestically: raise the cost of socially-detrimental goods to get these industries and countries to internalize the full costs of their action. The President understands this, saying: “We have to be careful about sending any protectionist signals.” (These are tough words from a guy who helped kindle a fire of protectionist sentiment in the public and congressional candidates that helped him gain his office, but the point stands.)
I still think I was right in the first place: if we could differentiate the signals, I think it could be a useful lever to push on. So why not do the following?
- Remove the provision from the Senate version of the omnibus energy bill and kill it in the reconciliation committee,
- Initiate a discussion under the auspices of something like the United Nations Environment Programme, including the EU and other industrialized countries that will
- tighten cap-and-trade restrictions or other regulations on a select few of the most energy-intensive industries and
- impose tariffs on goods from these industries from countries that have proven resistant to adopting emissions caps.
- Set up a coordinating body to regulate and adjust tariffs levels.
The provision cannot enter into the upcoming Copenhagen environment summit, which needs a consensus agreement. But this scheme would do two other beneficial things: first, it would serve as a point of integration for the European and American cap-and-trade markets (which diplomats have been looking for anyway), and; second, it would put pressure on recalcitrant countries to behave better at Copenhagen.
Filed under: Economics, Energy, sustainability , trade
A brief line in here tipped me off to something fascinating that is gradually gaining ground:
Last week, the energy secretary, Steven Chu, said he favored tariffs on Chinese goods if China did not sign on to mandatory reductions in greenhouse gas emissions — underscoring how the “green economy” could be the next trade battleground.
The idea is to target tariffs specifically to carbon-intensive goods. To be honest, it’s difficult to know what to think about this. It is a bad-behavior / bad-behavior swap at a huge scale to try to build a more sustainable world, a mercantilist idealism. It’s a real doozy.
The prospect of raising economic friction with China is not pleasant by any means; it is possibly a very reckless move. On the other hand, it is unquestionably reckless not to take some action on global warming, and this move has a couple of other salutary features. For one, it accepts Western complicity in fueling China’s unsustainable rise; while tariffs are usually thought of as selfish and mercantilist measures, in this case they have the added benefit of exerting more normative force than rhetorical pressure would alone. The difficulty is this: presumably, carbon-intensive goods would include those that the United States would be inclined to protectionism over anyway, causing mixed signals. Textiles and cheap consumers goods should be labor intensive and relatively cheap to import and so be classified as carbon-light goods; manufactured products (cars, plastics, rubbers, and electrical machinery and power generation equipment, which account for the largest Chinese exports by volume by far) and also raw materials because of their transport cost (iron and steel) would presumably be more carbon-intensive. In other words, we would be blocking for moral reasons the very goods we would want to block for selfish protectionist reasons.
My inclination is to be tentatively and carefully in favor of the proposal, simply because something must be done to build a sustainable China. If someone out there can help me with the conundrum above, that would count further in its favor.
Filed under: Economics , China, protectionism, sustainability, tariffs
As the sticker shock of the Obama administration’s plan to buy up toxic assets begins to subside and economists start to pore over its details, I want to emphasize a point I’ve made before: the government’s bottom line matters, and there is no good reason it shouldn’t come out much improved. The basic bargain is to extend government funds to buy toxic assets that the market can’t or won’t value from bank’s balance sheets so they can determine their bottom line and restart funding; selling these assets values them, puts them in the hands of companies willing to hold them, and injects confidence into the market about their worth. Naturally, this will take enormous quantities of public wealth.
The problem is this: given how the plan is structured, there is no reason the government should not be compensated for its outlay. When the plan on the table involved congress buying assets directly, the decisive issue was this: at what price? The danger was that it was an issue that seemed precisely formulated to exploit the weaknesses in democratic debate to cause huge amounts of harm for no good reason: because the issue was technical, would be decided behind closed doors, by Congress, was subject to huge incentives to alter the terms to meet lobbyist pressures after the fact, and also because the debate had been framed as ‘we might lose a lot of money’—there was little way anyone influential could look out for the public return.
Geithner’s plan simply shifts the decisive issue: Congress will no longer determine the price of mortgage-backed assets, but a market auction of private investors, who will be backed with public money. This is just right. However, there is another basic ambiguity: at what interest rate? The same principles that governed my previous arguments about valuation still apply: the government should lend at a rate high enough to guarantee a modest return but low enough to ensure that the assets move. Because we expect a) the selling of assets to raise their valuation; and b) the value of the assets to rise over time, investors should be able to repay public financing plus a decent premium, even allowing for the default of some of the private institutions. This also has the advantage of avoiding a massive subsidy to a group of people who have done nothing more than raise their hands; it forces them to incur personal and professional risk and take a stake in economic recovery.
In short, it is another issue that is purely positive sum; the only danger is that administrators get caught up in investor lobbying for lower rates. The issue has some of the same worrying features of the valuation question, but there is also reason to think we’re more likely to get this one right: we all understand interest rates, and we all know you don’t give money away for free. If the market can’t buy these assets and set the government straight, then this isn’t the right plan.
Bottom line? Charge interest, get the money back.
Filed under: Economics , bailout, geithner, interest
January 21, 2009 • 5:39 pm
To make a quick point that I haven’t seen mentioned much elsewhere regarding the recent course of the stock market—the chart above shows the course of the DJIA in the last three months. The chart begins just following the end of the precipitous drop at the beginning of October that lopped 25% off the Dow’s value. Since then the market has been exceptionally volatile—this chart spans 2,000 points on the Dow—but, it deserves to be said, flat, in aggregate. This condition held until two days ago, when a sell-off pushed the benchmark average below 8,000 points, for only the third time.
Just a little perspective to keep in mind, going forward.
Filed under: Economics , Stocks
September 24, 2008 • 6:42 pm
David Leonhardt once again comes through with nuanced and sure-headed commentary on the Wall St. bailout. I’m particularly grateful he’s expressing the uncertainty about the cost of the measure, which hinges on the all-important (but dangerously opaque) decision about what price at which these mortgages bundles will purchased: the undervalued market price (of something like 25 cents on the dollar), or our not-very-educated guess of the likely worth of the securities (something like 75 cents on the dollar). Opting for the former choice would essentially be tantamount to injecting capital into the balance sheets of Wall St. firms who hold the assets (which will help expand the credit supply and help the economy heal) but which is logically indistinguishable from another unrecoverable bailout of potentially massive and uncalculable magnitudes.
The conventional wisdom is as follows: in exchange for buying mortgage bundles at some intermediate price (call it fifty cents on the dollar), Congress demands some sort of stake in the firms from which they are buying, thereby balancing the initial cash injection by skimming some proportion of the profits subsequently. Talk about the era of big government being over. The difficulty here is that the reciprocal cash flow is totally opaque, difficult to quantify or weigh, and subject to potentially drastic changes in terms further down the line.
Why not do the following: buy the assets at auction at or slightly above market price. If a market can’t price these assets, neither can Congress. This almost certainly ensures a return on the taxpayer’s capital (and recovery of the interest incurred in making that extension of capital)–which, frankly, isn’t totally unheard of in the history of finance (and if the country is going to hell, it won’t be for usury). Any firms having difficulty extending credit can apply for loans, bailouts, or other liquidity extensions through the established mechanisms with which these issues are commonly dealt. They can then be assessed on a case-by-case basis and the market can make a similar assessment. Furthermore, those in government could gain some purchase over the relative costs of bailing out the financial sector and purchases of the bundles of securities. Not knowing what you’re spending money on tends not to be the best policy under democracy.
—a.j. mount
Filed under: Domestic, Economics , bailout, regulation
