Month: August 2008

Martin Feldstein, a proponent of the recent fiscal stimulus, said it didn’t work.

Here are the facts. Tax rebates of $78 billion arrived in the second
quarter of the year. The government’s recent GDP figures show that the
level of consumer outlays only rose by an extra $12 billion, or 15% of
the lost revenue. The rest went into savings, including the paydown of
debt….Although press stories emphasizing that the rebates induced additional
consumer spending were technically correct, they missed the important
point that the spending rise was very small in comparison to the size
of the tax rebates.

It’s a peculiar op-ed, however, as he then goes on to say:

The small rise in spending in response to these tax rebates is similar
to what previous studies of one-time tax cuts found. It also
corresponds to what both basic economic theory and common experience
imply. Although someone who receives a permanent annual salary increase
of $1,000 typically would increase his annual spending by an almost
equally large amount, a $1,000 rise in wealth caused by a share price
increase or a tax rebate would raise spending only gradually over a
number of years.

Right.  But a short-term tax cut is exactly what Feldstein called for in an earlier op-ed.

The poor effects of the Bush tax rebate as fiscal stimulus, however, let Feldstein now attack the Obama plan for a $1000 tax rebate.  Nothing wrong with that – McCain has nothing better however – but what Feldstein doesn’t say is that if you follow the logic of his two op-eds (and this is not something I would necessarily buy into) the conclusion should actually be that fiscal stimulus would work better if it ran through government spending.

Here’s Atrios:

I Want A Big Yard In A Walkable Community

But you can’t have it! Or, more
specifically, if everyone has a big yard the community ceases to be
especially walkable. That isn’t to say that you can’t have developments
with yards relatively near to retail, so that there is stuff within
walking distance. You can still have corner shops or similar, but
having sufficient residential density to support significant
neighborhood-serving retail isn’t really compatible with everyone has a
big yard.

Keep your yard!  Just understand the tradeoff.

DSN asks me:

With all the talk of a
(misguided) windfall profits tax on petroleum producers, I have a related
question…: 

Based on logic and observation
of input cost and profit trends in various industries, when the cost of raw
materials rise, companies in a competitive market are often not able to pass through
these cost increases and, therefore, may see a decline in profitability.
How then are oil companies able to make huge profits when oil prices rise
significantly.  Is this not a competitive market?  What is the
economic process in oil production, processing, and marketing that allows oil
companies to make record profits when the price of their raw materials is at
historically high levels?

Here’s one source, I am not sure how reliable:

…about two-thirds of Exxon Mobil’s profits come from oil
and natural-gas production outside the United States, with rising
production in Africa, the Middle East and Russia consistently
offsetting declining output in the United States, Canada and Europe.

Exxon
Mobil said it pumped 7 percent more oil and natural gas than it did
during the same quarter a year earlier.

In other words, Exxon already has paid for a concession in Nigeria and when the oil price is high profits for the company go up.  In that simple model a windfall profits tax leads to less pumping in the short run and even less pumping if people view the tax as temporary.  The tax also means fewer oil concessions in the longer run.  It is also possible — if you take the bargaining solution between Exxon and Nigeria as more or less given — that in the long run the tax redistributes income from the government of Nigeria to the government of the United States.  The less Exxon earns on net, the less it will offer Nigeria for the concession in the first place.

Addendum: Lynne Kiesling comments, worth reading.

Over the weekend a crew came round my neighborhood offering to paint house numbers on the curb.  Large bold curb numbers, they pointed out, make it easier for emergency service workers to find houses in the dark.  Good argument.  The price was good too.  Then I noticed my neighbors were having their numbers painted.  So of course, I declined.