Eighty-four percent of economists surveyed by the IGM Forum agree with the following statement:
Because all federal spending and taxes must be approved by both houses of Congress and the executive branch, a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.
That notwithstanding, political expediency again trumps sane economic policy, as James Hamilton explains:
The real purpose of the debt ceiling is political– it gives the minority party an opportunity to grandstand as if they’re somehow holding the line on the deficits that are the necessary mathematical result of previous spending and tax legislation.
Nobody has a plan on the table to cut spending by 26%, so nobody has any legitimacy pretending they’re against an increase in borrowing. Congress needs to propose specific plans for spending and taxes and simultaneously authorize the borrowing that would be necessary to implement that legislation.
By the way, anyone interested in the history of public debt limits should take a look at this 1954 paper by Cooke and Katzen.
Anybody with a pulse should know that the endless “deficit reduction” committees that are popular in Washington D.C. are nothing but window-dressing, but it’s instructive to compare their recommendations with the actual plan agreed to (surprise! at the last minute with high drama). Greg Mankiw has beat me to the punch on the divergence between the fiscal cliff deal and Bowles-Simpson:
The fiscal deal struck last night makes one thing clear: President Obama must have really hated the recommendations of the bipartisan Bowles-Simpson commission that he appointed. The commission said that we needed to reform entitlement programs to rein in spending and that increased tax revenue should come in the form of base broadening and lower marginal tax rates. The deal appears to offer no entitlement reforms, no tax reform, and higher marginal tax rates. After all the public discussion over the past couple years of what a good fiscal reform would like like, it is hard to imagine a deal that would be less responsive to the ideas of bipartisan policy wonks.
But I would add that the plan also diverges significantly from the more moderate Rivlin-Domenici plan. Here’s a quick summary of its proposals:
1. Cut tax rates and “broaden the base,” establishing two income tax rates of 15 and 27 percent (replacing the current six rates that go up to 35 percent).
2. Lower the corporate rate from 35 percent to 27 percent.
3. Eliminate most deductions and credits in the tax system, replacing the mortgage interest deduction with refundable credits.
4. Create a 6.5 percent debt reduction sales tax
5. Change the cost-of-living adjustment calculations for social security benefits while slowly raising the amount of wages subject to the social security tax.
6. Freeze defense discretionary spending for 5 years.
7. Eliminate farm subsidies to producers with >$250,000 adjusted gross income.
Do either of these deficit-reduction panel proposals sound remotely like the deal that was passed by an 89-9 margin in the Senate?
Greg Mankiw links to a new CBO report on taxes, and offers a suggestion.
Offering a much different view of tax policy, Paul Krugman longs for a return to a 91% top marginal rate.
Bernanke on economic recovery and policy.
Calculated Risk on an improving housing market.
As the fiscal cliff approaches, Glenn Hubbard has a suggestion:
“The first step is to raise average (not marginal) tax rates on upper-income taxpayers,” he wrote. “Revenues should come first from these individuals.”
Mr Hubbard said that could be achieved by eliminating tax loopholes and capping popular deductions – such as those for mortgage interest, charitable giving and employer-provided health plans – rather than allowing Bush-era tax rates for the rich to expire this year, as Democrats are demanding.
if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013.
Matt Yglesias has a nice summary of the economics of taxing investment versus labor income.
The reasoning is basically this. You imagine two prosperous but not outrageously so working people living somewhere—two doctors, say, living in nearby small towns. They’re both pulling in incomes in the low six figures. One doctor chooses to spend basically 100 percent of his income on expensive non-durables. He goes on annual vacations to expensive cities and eats in a lot of fancy restaurants. The other doctor is much more frugal, not traveling much and eating modestly. Instead, he spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they’re capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor.
So then there are too different scenarios:
— In the world where investment income isn’t taxed, the second doctor says to the first doctor “all those fancy vacations may be fun, but I’m being much more prudent. By saving for the future, I’ll be comfortable when it comes time to retire and will have plenty left over to give to my kids.”
— In the world where investment income is taxed like labor income, the first doctor says to the second “man you’re a sucker—not only are you deferring enjoyment of the fruits of your labor (boring) but when the money you’ve saved comes back to you, it gets taxed all over again. Live in the now.”
And the thinking is that world number one where people with valuable skills take a large share of their labor income and transform it into capital goods is ultimately a richer world than the world in which such people just go out to a lot of fancy dinners.
This article by Ed Butowsky is just strange enough to warrant a post. In fact, it’s so bad I think it might qualify for an article in The Onion. In short, it claims that (1) the president decides on monetary policy, (2) the president chose monetary policy instead of fiscal policy, (3) the monetary policy he chose did not work, (4) the monetary policy is generating high rates of inflation, and (5) rates of inflation are mismeasured (which is apparently somehow related to the number of people on welfare and the size of the national debt).
From the article:
Faced with very bad economic conditions, the president decided that monetary policy (printing money and infusing it into the economy ) was a better choice than attempting to fix the economy by fiscal policy (in this case, reducing the tax burden on corporations and individuals).
First (and I really hope Butowsky knows this), the president does not decide when to print money and infuse it into the economy.
Second, unless I’m really confused, we did actually have a fiscal policy response that both reduced the tax burden and increased government spending. Now, one could argue for or against the merits of the particular fiscal policy that was used, but how can Butowsky possibly claim that the president decided to use monetary policy instead of fiscal policy? Has he missed the entire debate about the stimulus?
His mistakes continue:
recent M3 data prove that the money supply is growing at a very rapid rate, and this is a leading indicator of inflation.
This is odd since the Fed stopped publishing M3 statistics in 2006. But, let’s assume that’s a slip, and he actually meant M2.
It is true that the level of M2 rose sharply as the Fed tried to deal with the financial crisis:
But the year-over-year growth rate in M2 has been trending lower – not higher – all year. Here it is:
And the inflation that is supposedly following from all this?
What about the latest estimates of expected future inflation rates? The Federal Reserve Bank of Cleveland’s latest estimate of 10-year expected inflation is 1.26 percent. Not quite Weimar Republic territory.
And the rousing conclusion?
I continue to contend that inflationary pressures are great in this country, but the government simply does a terrible job calculating it. We all know the numbers — 47 million people on food stamps, 25 million underemployed, lowest number of people employed since 1980′s, $16 trillion in debt (and we require $1.3 trillion more each year to meet our budget shortfall).
However, what is about to make this even worse is that, due to the choice the president made in early 2009 to print money, we are about to see prices soar in this country. Add to this unnecessary and ineffective approach that we might see more destruction of the U.S. dollar with QE3.
So inflationary pressure is great, yet we don’t measure it in the traditional statistics [oh, and I retract my earlier comment that Butowsky must really know that the president is not in charge of monetary policy]. Okay, how about the Billion Price Project at MIT?
The economy remains depressed and there is practically no inflationary pressure from labor markets:
As Greg Mankiw explained a year ago:
The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm’s costs. A persistent inflation problem is unlikely to develop until labor costs start rising significantly. Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data. The same thing is not happening now. This is one reason I think the Fed is on the right track worrying more about the weak economy than about inflationary threats.
Since he wrote that, the year-over-year growth rate in earnings has fallen from about 2% to nearly 1%.
These facts are not that hard to understand nor are the data difficult to obtain, so I’m left with this question: how on earth does this stuff get published?