Category: Economics

As you know, I’m not enthusiastic about a fiscal stimulus plan.  What we need is a stimulus plan that does not increasing the budget deficit or waste taxpayer funds but that does increase the incentive to produce output.  So what would I do?  Here’s a new idea.

The IRS knows how much income that each taxpayer reported last year.  So let’s cut everyone’s marginal tax rate based on last year’s income.  In other words, suppose that last year Joe earned $66,520 which puts him in a 25% tax bracket.  Joe’s tax schedule this year will be exactly the same as last year except for every dollar earned above $66,520 the tax rate drops to 15%.   We do this for all taxpayers so that each taxpayer has their own schedule and for each taxpayer there is a decreasing marginal tax rate.

Note that this plan increases the incentive to work and it doesn’t increase the deficit.  In fact, the Tabarrok plan increases tax revenues!  The key is a marginal tax cut with a different margin for every taxpayer based upon last year’s return.

That’s the basic idea but there are some obvious modifications that could solve various problems.  For example, the new schedule could be based on an average of say the last three years of income or the average plus some roundup for growth etc.  It’s also possible to cap the base on which the lower marginal tax rate applies, for example, we could create a lower tax rate on every dollar of income above last year’s income up to an increase of 20%.

It is true that a permanent system like this could be (partially) gamed but the system can work very well if used occasionally, say for the most serious recessions.  We would also learn a lot by applying this system and looking at the taxpayer response. 

A new Cato study, by Indur Goklany, suggests that instead of carbon taxes we should spend money on better water policy, drought prevention, anti-malarials, sea level protection, and so on.  In general we should make the world as wealthy as possible.  Here is the link, the piece is intelligent throughout and well worth reading.

Two questions suggest themselves.  First, is the choice either/or?  I don’t see arguments against a revenue-neutral carbon tax.  Second, is there really enthusiasm for the proposed measures or is the real intent to do little or nothing on carbon?  Since this is both a Goklany piece and a Cato piece, an interesting question arises: who exactly is now obliged to push for anti-malarial foreign aid?  Cato?  Goklany?  Either/or?  Both?  Or is it enough to just make the comparison once and leave it at that?

When it comes to big business, appearances it seems, matter a lot.
Companies tend to be more profitable if they have a chief executive
with a face rated by observers as being more competent, dominant and
mature.

Similarly, companies with a chief executive judged to be
a good leader, based purely on his facial appearance, also tend to be
more profitable. These associations still hold even after controlling
for the influence of age and attractiveness.

As Nicholas Rule
and Nalini Ambady, who conducted the research, point out: it isn’t at
all clear whether chief executives with a certain kind of appearance
help their company towards profit, or if instead profitable companies
choose to employ chief executives who look a certain way.

Here is more information.

In a frightening inversion of satire into reality, European candlemakers are petitioning for protection; here is Bastiat’s take on that.  This time it’s against — can you guess?  — the Chinese.

Thanks to Tim Worstall for the pointer.

This is from Bryan Caplan:

Fun facts from Kip Viscusi‘s article on "Job Safety" in David Henderson’s encyclopedia:

Annual OSHA penalties for safety violations (2002): $149,000,000

Annual Workers Compensation Premiums (2001): $26,000,000,000

Estimated Annual Wage Premiums for Risky Activities (2004 dollars): $245,000,000,000

His point: Market incentives for worker safety dwarf legal incentives, which in turn dwarf regulatory incentives. The level of safety we see in the workplace today is about the same as the level we’d see if government just looked the other way.

Addendum: This picture shows how much OSHA has increased American job safety.

Here is his non-excerptable attempt, via Brad DeLong.  Still I am not convinced.  Using the Law of the Excluded Middle, yes you can get me to agree that the stimulus package is unlikely to do direct economic harm.  I still see the stimulus plan in terms of larger symbolic battles.  We pass too many policies just to show politicians are "doing something," just because it is an election year, just because voters think government should solve every problem, and just because politicians know that voters don’t understand any real economics.  This fits all those categories.  On the substance, I would add that for the U.S. "not going bankrupt" is a matter of degree.  Compared to Brad or Arnold Kling, I’m still a fiscal optimist.  But I’ve spent too much time reading papers on the intransitivity of indifference relations:  "Just another grain of sugar in your coffee, dear.  It won’t change the taste even a tiny bit…"

Paul Krugman points to the new Federal Reserve senior loan officer survey which reports that standards for commercial real estate loans are tightening creating in Krugman’s words "an incredible credit crunch in progress."

Over at Carpe Diem, however, Mark Perry looks to Federal Reserve data on actual loans and finds that commercial loans from large banks are at an all time high and increasing rapidly.

The credit crunch, if that is what one should call higher standards, appears to be contained to the real estate market.

Best evidence that the merger between Microsoft and Yahoo will increase competition?

Publicly, Google came out against the deal, contending in a statement
that the pairing, proposed by Microsoft on Friday in the form of a
hostile offer, would pose threats to competition that need to be
examined by policy makers around the world.

Here’s an Open Letter on Antitrust Protectionism (pdf) that I drafted nearly ten years ago during the Microsoft trial.  It’s still relevant today.

French Finance Minister Christine Lagarde said Monday that some internal controls at Societe Generale failed or were ignored before the banking giant announced massive losses attributed to a single trader.

Here is one version of the story.  It’s gotten plenty of news coverage.  It’s gotten relatively little pundit coverage.  It neither fits the pro-market narrative of one side, nor the "blame it on the Bush administration and deregulation and bad U.S. corporate governance" narrative of the other.  By noting the story, and pondering its broader implications ("your favorite hobby horse matters less than you think"), I would like to do my small amount to counteract the silence of the pundits.  By the way, I owe this concept to Daniel Klein.

Via Brad DeLong and Mark Thoma, here is Mark quoting Brad:

But as Rodrik points out, "…saying that the impact of globalization
on advanced-country labor markets is quantitatively rather small in the
real world and is overshadowed by other phenomena (such as
technological change) is no different [in the Heckscher-Ohlin-Vanek
framework] from saying that the gains from trade have in practice been
small."  There is a problem of cognitive dissonance here.

I worry about this, but I am not so sure that trade advocates have painted themselves into a corner.  Trade can improve the global economy in at least three ways: a) factor price equalization and the resulting higher output, b) spreading innovations, new technologies, and new products, and c) by improving domestic politics.  The existence of b) and c) means that the gains from trade can in principle be large while the factor price equalization effect is relatively small.  Factor b) points us toward a very favorable opinion of trade.  Rodrik of course also worries about c):

How does Rodrik believe that globalization undermines social democracy?
First, because globalization has undermined governments’ ability to
carry out social insurance programs.

I’m not sure that Rodrik’s view is so uniform on this question; for instance he has a JPE piece suggesting that more open economies are more likely to be interventionist.  In any case my view is that the wonders of Sweden, Denmark and Norway rely very heavily on external trade.  Note that "openness" and "smallness" are distinct but correlated variables here; most likely both qualities are necessary for welfare states of the Nordic kind.  Or look at it from the other side.  In recent times (though it has been changing) Brazil and India were relatively closed to trade, and I don’t see that it led them to take better care of their poor.  International trade also makes countries more tolerant and it makes people more interesting.  That’s the old classical liberal case for trade from Wilhelm von Humboldt and Richard Cobden; let’s not toss it out just because Heckscher-Ohlin came along.

The fertility rate in the United States is the highest it has been in 35 years.  Are Alan Greenspan and predatory lenders to praise or blame?  You be the judge.

I very often do, but I think he overreaches when responding to Steven Landsburg (who himself overreaches).  Jason writes:

…there is near universal agreement (and if it were not for you I probably would not have needed the word "near") that when the economy is operating below its productive capacity the problem is insufficient aggregate demand, and the solution is to temporarily boost spending or investment through monetary or fiscal policy.

Usually, yes.  Sixty percent of the time, I will agree.  But sometimes real shocks and sectoral shifts are the problem.  Can expansionary monetary policy help an economy adjust to sectoral shifts?  Sometimes but not always.  Is Furman correct that deregulation won’t help in the short run?  Yes.  Is "the solution…to temporarily boost spending or investment through monetary or fiscal policy"?  Probably not.  The solution is for the economy to adjust.  The flow of investment is hard to encourage and the best monetary policy can do in such instances is to prevent a deflation.  If the government can do something to help short-run sectoral adjustments, it is usually clarity of expectations and legal and regulatory benchmarking in the interests of transparency.  Today that means clear standards for future lending and securitization.

As an aside, if you are someone who complains about stagnant American median wages, that means many particular nominal and real wages have been falling.  (It could be in theory that the entire distribution is strictly stagnant but in reality no.)  Tricky distinctions between real and nominal wages lie beneath the surface, but overall this flexibility of wages makes it harder to embrace the Keynesian framework.  Keynesianism requires sticky nominal wages and since we have been having low inflation times (until now, at least) that means relatively sticky real wages as well.  Yet it is claimed implicitly that many real and nominal wages have been falling.  Beware the Keynesian who wants to have it both ways (I’m not accusing Jason of this).

Abhijit Banerjee, Angus Deaton, and Esther Duflo are all upset.  You might recall the most famous recommendation of the Copenhagen Consensus was to invest in anti-HIV/AIDS programs as a higher priority than global warming.  Banerjee writes:

Similarly, the proposal on HIV/AIDS seems to have entirely missed the mounting evidence…that we do not really know how to get people to behave in ways that would reduce the transmission of HIV.

Angus Deaton writes:

Lomborg’s Consensus does not even identify the "we" who are to spend the $50 billion, although it certainly shares Sachs’ confidence in the usefulness of social engineering by well-meaning outside experts.

Maybe that criticism is unfair; Lomborg might say he is playing by the rules of other people’s games.  Esther Duflo writes:

…to my knowledge there is very little rigorous evidence on effective [HIV-AIDS] prevention strategies in Africa.

The three reviews are all in the Journal of Economic Literature, December 2007.  The bottom line is that $50 billion doesn’t go as far as you might think. 

If every American saved the rebate and invested it in equities, we might be (ever so slightly) better off.  Government can borrow at a low interest rate for us.  Of course we’re being told to spend the money.

Most fundamentally, more aggregate demand is not the answer because insufficient aggregate demand was not the problem in the first place.  Just as a social framing effect (and lots of fraud) led subprime loans to be perceived as
"not very risky," right now social framing effects — call them collective fear — are causing lower asset prices, some degree of
credit constipation, and higher risk premia.  The economy is undergoing a sectoral shift toward less risky assets and that can bring an economic downturn.  The shift itself is costly, it brings thorny coordination problems (e.g., sudden insolvencies, overturning of credit expectations), and lower-yielding assets also mean less wealth.  Lack of liquidity simply is not the fundamental problem. 

Arguably there is a secondary negative aggregate demand shock at work, mostly because asset prices are lower from the sectoral shift.  Monetary policy should offset this secondary effect, to keep things from getting worse, but still monetary policy won’t and indeed can’t set things right again.   

More speculatively, you might argue that boosting aggregate demand may convince people to postpone their adjustments to the sectoral shift, thereby making the coordination problems last longer.  Maybe, but I won’t push that on you for lack of evidence.  Another speculative argument is that boosting aggregate demand can push us all back into optimistic expectations but that is unlikely. 

The bottom line: Our expectations from the Fed or a stimulus plan should be very modest, even if the boosts to aggregate demand are done perfectly.

Eli Lehrer informs me that Tide has a high market share even though it is more expensive than most other brands.  This source says the market share of Tide is about forty-four percent, with the sum total of all Proctor and Gamble products (Gain and Cheer are two others) accounting for about two-thirds of the market.  Is Tide so good?  Does Tide really "know fabric best"?  I couldn’t name one supposed feature of the product and I’ve been buying detergent my whole life.  I couldn’t even tell you what brand I buy.  Maybe it is Tide.  This is the kind of question that Wikipedia isn’t much good for.