Results for “corporate tax” 239 found
Can vigilant creditors limit excess bank risk-taking?
I had promised to address that question. Ideally, enforceable bond covenants should limit bank risk-taking, and ensure major bank solvency, but is that feasible? I see a few problems with the idea:
1. It is very hard for a government or central bank to precommit to a "no bailout" policy. This is partly because of powerful special interests, but most of all because political time horizons are short. Most bailouts do patch things up in the short run, whether or not you like their longer-run consequences. Bondholders know this, and they are less vigilant ex ante.
2. Bondholders don't and can't have much idea what is going on inside the trading book of a bank. It doesn't matter how financially sophisticated the bondholders are; the point is that the trading book must remain fairly confidential and a lot of risk can be put in the trading book.
3. Some of the creditors — the short-term creditors — may be in on the deal. They lend money to the banks, under the premise that risky strategies will be executed. The short-term, collateralized creditors may not themselves be bearing much risk, given their superior "flight" capabilities and they also may be receiving a slight premium for such lending.
4. The net risk of a bank position is not determined solely by the bank's portfolio. Say a bank lends money to homeowners and then those homeowners increase their leverage. The bank is now in a riskier position, and de facto a more leveraged position, althoug it's measured leverage hasn't gone up a whit.
5. Experience with the ICE clearinghouse — one form of bank creditor — so far suggests that it serves bank interests, and indeed is largely controlled by the banks, rather than restraining them.
6. Let's say a no-bailout policy was credible, as indeed it was in the 19th century (there were no bailout facilities). What does the equilibrium look like? Is there less long-term lending to banks and more short-term lending? Would that make banks more or less stable? Few people think this is a positive development for countries. Would banks be more subject to "capital flight" risk?
We also could expect greater mutualization of banks, as was the case before deposit insurance, and we could expect experimentation with corporate forms other than limited liability. My view is this is what would be required to limit excess bank risk-taking. Yet I believe that, for better or worse, it is politically impossible. In a nutshell, big government needs big finance (or much higher taxes).
One reason that bailouts are so politically popular (not in rhetoric, but in their practice and in their effects) is that they make financial crises less common but, when they come, more severe because more leverage has built up. That change in the structure of returns is usually a political winner, call it "Ticking Time Bomb."
The newest and best data on income inequality
The paper is by Bakija, Cole, and Heim, find it here.
There is much to say about this paper, but first of all the Kaplan and Rauh work, which I have cited several times, seems to offer incorrect estimates of the professions of the higher earners. Here is the authors' corrective chart:
Here is a summary of their broader results:
Our findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005. We also demonstrate significant heterogeneity in income growth across and within occupations among people in the top percentile of the income distribution, suggesting that factors that changed in the same way over time for all high income people are probably not the main cause of increasing inequality at the top. The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1 percent of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence suggests that financial market asset prices, corporate governance, entrepreneurship, and income shifting across corporate and personal tax bases may be especially important in explaining the dramatic rise in top income shares.
I would reword this as a) "it's complicated," and b) "a lot of them made the money in capital markets." It does remain the case that top incomes in finance rose by far most rapidly.
In this very careful and rigorous paper, here is a "scream it from the rooftops" result:
…we find that a one percent increase in the net of tax share is associated with an 0.7 percent reduction in incomes earned by people in the top 0.1 percent of the income distribution, which would imply that if we were to raise top marginal tax rates further on these taxpayers, the increase in deadweight loss would be substantially larger than the increase in revenue raised [emphasis added]. However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent…
Better stock up on those cough drops.
For the pointer I thank Adam Looney.
Assorted links
Assorted links
Is policy uncertainty the problem?
Pete Boettke says "policy is the problem." Ezra says he can't find evidence that policy is the problem.
I hold the intermediate view that policy uncertainty is a problem but not the problem. On one hand, policy uncertainty probably has been greatest for the health care sector, yet job growth in that sector has been relatively robust. Furthermore, Obamacare may bring uncertainty, but part of the uncertainty is about whether employers can get away with dumping their workers onto the subsidized exchanges. Arguably that should help hiring rather than hurt it.
I expect electoral gridlock by November yet no one seems to be welcoming that "certainty" very much.
Perhaps most importantly, deleveraging recessions usually take a long time to recover from in any case and there's not a lot of good cheer along the way.
I would be more convinced by the uncertainty view if it were combined into a larger, coherent story, consistent with reported corporate profits being fairly high.
Do the implicit volatilities embedded in option prices show a lot of expected uncertainty? Maybe, but again I'm waiting to see the evidence. If so, this one should be staring us right in the face.
On the other side of the ledger, the tax code remains highly uncertain, to our detriment, and monetary policy is some mix of uncertain and baffling (though see the above point on implicit volatilities).
There is also behavioral economics. An image or speech or proposed law can crush a mood, whether or not that is rational. I can't cite a lot of systematic evidence for this having happened, but I know from talking to people how many of them think, rightly or wrongly, that Obama is very very bad for the American economy. I believe that is a factor in our slow recovery.
Be careful to separate your positive and normative views here. Maybe the audience is "at fault," rather than the messenger, but still some people are very upset. Every time I read a left-wing writer dismantling "right-wing media" I think they are actually providing another data point for the policy uncertainty hypothesis, although that is hardly their intent. In many circles there is a perceived problem with our country, regardless how much that is based on fact or not. If food consumers can be irrational and moody, political consumers (who are also investors) can be the same. Still, I don't know how significant this factor is.
Temporary hiring is quite high, while permanent hiring is not. However that need not show that the decisive uncertainty comes from politics. Furthermore it instead could mean that the fixed cost of hiring labor full-time is high but not uncertain.
A lot of the current uncertainty is about a higher estimate of overall systemic risk, rather than from politics per se. Such risk worries may be a blend of private and public sector factors, such as worries about Europe or China. Economic and political uncertainty are not always separable categories.
Overall I don't see a lot of clear evidence on this question but I think policy uncertainty is one factor, albeit an exaggerated factor in many circles.
Larry Kotlikoff responds on limited purpose banking
You can read his reply here. Note however that my criticisms explicitly are directed at narrow banking more generally, most of all my own (previous) version of the idea, not at the specific version of Kotlikoff's proposal. There is one particular topic I did not deal with, and on it I will quote Kotlikoff reproducing my critique and responding to it:
TC: A lot of what current banks do would be replicated by non-bank commercial lenders and the risk of the banking sector would be transferred somewhere else.
LK: You missed the key point that all incorporated financial intermediaries have to operate as mutual fund companies. There are no “non-bank commercial lenders” unless they operate as proprietorships and partnerships and their owners have their houses and yachts on the line. The risk of the banking sector is reduced because we set it up to eliminate any chance of bank runs and gambling by the banks with the taxpayers’ chips. Recall, the mutual funds are 100 percent equity financed at all times and in all situations.
TC: Ideally, these non-bank lenders would engage in greater “maturity-matching,” but if banks will exploit the moral hazard problem won’t these lenders exploit it too?
LK: The only financial intermediaries who can operate under Limited Purpose Banking according to the current rules of the road are private banks with no limited liability. The lack of limited liability will eliminate the moral hazard problem.
I am not inclined to see unlimited liability as a practical alternative. How many businesses supply commercial credit? Trade credit? Credit by any other name? — namely contracts involving derivatives, annuities, insurance, repurchase agreements, etc., with intertemporal payments and embedded interest rates in the prices. Would they all have to give up limited liability? Or would we end up channeling more financial intermediation through indirect credit transactions, while maintaining limited liability? A version of this dilemma is experienced regularly by systems of equity-based Islamic banking..
Second, unlimited liability creates a pecuniary externality across shareholders. Who wants to be the remaining "fat cat" shareholder? Why should Bill Gates ever invest? Non-mutual fund banks will end up owned by thinly capitalized individuals or entities, thereby defeating the purpose of unlimited liability while at the same time raising transactions costs. Walter Bagehot made this point, see also Joseph Grundfest, here is Hansmann and Kraakman with a reply. Alex very ably surveys the main arguments in an MR post.
Unlimited liability is fine for small-scale, private banking, especially in the international sector where tax evasion is a motive and the banks aren't fully part of any standard regulatory network. It doesn't work to force it on such a large sector of the economy as most commercial credit and non-bank lending.
In sum, I do not believe that narrow banking proposals benefit from being bundled with unlimited liability for other lenders.
Where should LeBron James go?
According to what moral theory?
Still, to me the answer is obvious, though no one seems to even discuss my idea. He should go to the Los Angeles Lakers. For a one-year contract, zero pay, if he can't convince the Lakers to pay the luxury tax. Better yet, make zero pay part of the PR in an age where viewers are sick of huge corporate bonuses for non-winning CEOs. This way he would learn the ways of a winning organization, which he needs to do, and very likely win a title immediately. He would convince Phil Jackson to return for another year. Most of his income comes from endorsements anyway, so he doesn't need the salary, plus the title and Los Angeles exposure would make his name more valuable. He would get "credit" for the title (does anyone these days complain that Magic Johnson never won a title without Kareem Abdul-Jabbar? No.) He could play fewer minutes and extend his career and keep his stamina intact for the playoffs. The next year he could move on or he might even decide to stay, pairing with Gasol and Bynum for years, while Kobe slides into a sixth man role. Since he has had good health, he could buy an insurance policy to protect against career-ending injury.
The idea of pairing James with Wade and Bosh seems to me extremely misguided: LeBron, please read Ludwig Lachmann's Capital and its Structure!
The new financial regulation bill
NEW REGULATORY AUTHORITY: Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm's collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Treasury would supply funds to cover the
up-front costs of winding down the failed firm, but the government would have to put a "repayment plan" in place. Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.
OVERALL A GOOD PROVISION, ALTHOUGH THE ACTUAL INCIDENCE OF THESE FEES IS TRICKIER THAN THE DESCRIPTION INDICATES.
FINANCIAL STABILITY COUNCIL: Would establish a new, 10-member Financial Stability Oversight Council, comprising existing regulators charged with monitoring and addressing system-wide risks to the nation's financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, it would have the power to break up financial firms.
I'M NOT ENTHUSIASTIC, THOUGH PERHAPS IT WILL JUST BE A WASH. NONETHELESS IT REFLECTS A BAD AND DANGEROUS ATTITUDE ABOUT WHAT REGULATORS ARE CAPABLE OF.
VOLCKER RULE: Would curb propriety trading by the largest financial firms, though banks could make de minimus investments in hedge and private-equity funds. Those investments would be limited to 3% or less of a bank's Tier 1 capital. Banks would be prohibited from bailing out a fund in which they are invested.
IT'S HARD TO TELL WHAT ACTUAL RESTRICTIONS WILL BE IN PLACE AND MOST LIKELY THERE WILL BE MAJOR LOOPHOLES. YOU DON'T HAVE TO HATE THIS PROPOSAL — RECALL THE POPULARITY OF "NARROW BANKING" PROPOSALS IN THE 1990S AS A KIND OF SECOND-BEST REFORM, CONSIDERED BY MANY MARKET-ORIENTED ECONOMISTS. FURTHERMORE IF MARKETS ARE PRETTY LIQUID, KEEPING THE BANKS OUT OF THESE MARKETS MAY NOT HARM MUCH AT ALL. STILL, I'LL PREDICT THIS DOESN'T DO ANY GOOD.
DERIVATIVES: Would for the first time extend comprehensive regulation to the over-the-counter derivatives market, including the trading of the products and the companies that sell them. Would require many routine derivatives to be traded on exchanges and routed through clearinghouses. Customized swaps could still be traded over-the-counter, but they would have to be reported to central repositories so regulators could get a broader picture of what's going on in the market. Would impose new capital, margin, reporting, record-keeping and business conduct rules on firms that deal in derivatives.
I WAS AN EARLY PROPONENT OF THIS IDEA MYSELF, BUT LATELY I'VE STARTED TO WORRY ABOUT HOW WELL CAPITALIZED THIS CLEARINGHOUSE WILL NEED TO BE. I'LL STILL COUNT IT AS A NET PLUS, BUT I DON'T THINK WE'VE THOUGHT IT THROUGH VERY WELL.
SWAPS SPIN-OFF: Would require banks to spin off only their riskiest derivatives trading operations into affiliates, in a late-night compromise struck to scale back a controversial provision championed by Sen. Blanche Lincoln (D., Ark.). Banks would be able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps among others. Firms would be required to push trading in agriculture, uncleared commodities, most metals, and energy swaps to their affiliates.
THE DEVIL IS IN THE DETAILS. MAYBE THE AFFILIATES ARE NOT "TOO BIG TO FAIL" BUT WHAT REALLY MATTERS ARE THE COUNTERPARTIES ON THE OTHER SIDE OF THE TRANSACTION. WE STILL BAILED OUT LTCM, REMEMBER THAT?
CONSUMER AGENCY: Would create a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses; banks and credit unions with assets of more than $10 billion in assets; pay day lenders, check cashers and certain other non-bank financial firms. Auto dealers won a hard-fought exemption from the Bureau's reach.
WE'LL SEE.
PRE-EMPTION: Would allow states to impose their own stricter consumer protection laws on national banks. National banks could seek exemption from state laws on a case-by-case, state-by-state basis if a state law "prevents or significantly interferes" with the bank's ability to do business – a higher bar than federal regulators currently must meet to pre-empt state rules. State attorneys-general would have power to enforce certain rules issued by the new consumer financial protection bureau.
THIS SHIFTS THE WORDING OF THE LAW, BUT DOES IT CHANGE THE POLITICAL EQUILIBRIUM? AGAIN, "WE;LL SEE."
FEDERAL RESERVE OVERSIGHT: Would mandate a one-time audit of all of the Fed's emergency lending programs from the financial crisis. The Fed also would disclose, with a two-year lag, details of loans it makes to banks through its discount window as well as open market transactions – activity the Fed currently doesn't disclose. Would eliminate the role of bankers in picking presidents at the Fed's 12 regional banks. Would also limit the Fed's 13(3) emergency lending authority by barring the central bank from using it to aid an
individual firm, requiring the Treasury Secretary to approve any lending program and prohibiting the participation of insolvent firms.
A MISTAKE, BUT THIS COULD HAVE BEEN MUCH WORSE.
OVERSIGHT CHANGES: Would eliminate the Office of Thrift Supervision, but after a fight, the Fed retained oversight of thousands of community banks. Would empower the Fed to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
OVERALL I AM PRO-FED AND SO THIS PLANK COULD HAVE BEEN MUCH WORSE, FORTUNATELY WE HAVE NOT REALLOCATED FED POWERS IN A MAJOR WAY TO LESSER REGULATORS.
BANK CAPITAL STANDARDS: Would set new size- and risk-based capital standards, including a prohibition on large bank holding companies treating trust-preferred securities as Tier 1 capital, a key measure of a bank's strength. Would grandfather trust-preferred securities for banks with less than $15 billion in assets, enabling them to continue treating the securities as Tier 1 capital. Larger banks would have five years to phase-out trust-preferred securities as Tier 1 capital.
IT'S BASEL III WHICH WILL REALLY MATTER AND WE SHOULDN'T EXPECT MUCH FROM THAT FORUM. WE'RE DROPPING THE BALL ON A MAJOR ISSUE.
BANK FEE: Would mandate the Oversight Council to impose a special assessment on the nation's largest financial firms to raise up to $19 billion to offset the cost of the bill. The fee would apply to financial institutions with more than $50 billion in assets and hedge funds with more than $10 billion in assets, with entities deemed high risk paying more than safer ones. The fee would be collected by the FDIC over five years, with the funds placed in separate fund in the Treasury and would not be usable for any other purpose for 25 years, after which any left-over funds would go to pay down the national debt.
THIS IS FOR PR, SO THE POLITICIANS CAN CLAIM TAXPAYERS WON'T BE ON THE HOOK AGAIN. RIGHT. ALSO, STUDY TAX INCIDENCE THEORY AND GET BACK TO ME.
DEPOSIT INSURANCE: Would permanently increase the level of federal deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008.
ALREADY DONE, SO TO SPEAK.
MORTGAGES: Would establish new national minimum underwriting standards for home mortgages. Lenders would be required for the first time to ensure that a borrower is able to repay a home loan by verifying the borrower's income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans.
DEVIL IS IN THE DETAILS.
SECURITIZATION: Banks that package loans would, broadly, be required to keep 5% of the credit risk on their balance sheets. Would direct bank regulators to exempt from the rules a class of low-risk mortgages that meet certain minimum standards. Regulators could permit alternative risk-retention arrangements for
the commercial mortgage-backed securities market.
WASTE OF TIME. YOU CAN JUST AS EASILY ARGUE THE PROBLEM WAS INSUFFICIENT SECURITIZATION. AND HOW HAVE SIMILAR RULES WORKED OUT FOR THE SPANISH?
CREDIT RATING AGENCIES: Would revamp the credit-rating industry, establishing a new quasi-government entity designed to address conflicts of interest inherent in the credit-rating business after the SEC studies the matter. Would also allow investors to sue credit-rating firms for a "knowing or reckless" failure to conduct a reasonable investigation, a lower liability standard than the firms were lobbying to get. Would establish a new oversight office within the SEC with the ability to fine ratings agencies and empowers the SEC to
deregister a firm that gives too many bad ratings over time.
THE BEST EQUILIBRIUM IS TO HAVE DISCREDITED RATINGS AGENCIES, NOT REVAMPED AND REREGULATED AGENCIES.
INVESTMENT ADVICE: Would give the SEC the authority to raise standards for broker dealers who give investment advice after the agency studies the issue. Would permit, but not require, the SEC to hold broker dealers to a fiduciary duty similar to the standard to which investment advisers are held.
COULD EASILY END UP MEANING NOTHING.
CORPORATE GOVERNANCE: Would give shareholders of public corporations a non-binding vote on executive pay and "golden parachutes," and would give the SEC the authority to grant shareholders proxy access to nominate directors.
COULD EASILY END UP MEANING NOTHING.
HEDGE FUNDS: Would require hedge funds and private equity funds to register with the SEC as investment advisers and to provide information on trades to help regulators monitor systemic risk.
COULD EASILY END UP MEANING NOTHING.
INSURANCE: Would create a new Federal Insurance Office within the Treasury Department to monitor the insurance industry, recommending to the systemic risk council insurers that should be treated as systemically important. Would require the new office to report to Congress on ways to modernize insurance
regulation.
I AGREE WE SHOULD NOT TRUST STATE-LEVEL REGULATORS WITH FIRMS SUCH AS AIG, BUT LET'S HAVE MODEST EXPECTATIONS ABOUT WHAT THIS OFFICE WILL ACHIEVE. IT PROBABLY WOULDN'T HAVE STOPPED THE AIG DEBACLE EITHER.
-By Victoria McGrane, Dow Jones Newswires
THE BOTTOM LINE: THE GOOD PARTS OF THE BILL AREN'T NEARLY AS GOOD AS THEY SHOULD BE, AND THE BAD PARTS BECAME MUCH BETTER WITH TIME. THE BIGGEST OMISSIONS ARE SIMPLE AND TOUGHER RESTRICTIONS ON LEVERAGE AND REFORM OF THE MORTGAGE AGENCIES. OVERALL CONSIDER THIS A VICTORY FOR THE STATUS QUO AND YOU SHOULD REALIZE THAT THE UNDERLYING PROBLEMS HAVE NOT BEEN SOLVED.
Investing in the Poor
The Unincorporated Man is a science fiction novel in which shares of each person's income stream can be bought and sold. (Initial ownership rights are person 75%, parents 20%, government 5%–there are
no other taxes–and people typically sell shares to finance education and other training.)
The hero, Justin Cord a recently unfrozen business person from our time, opposes incorporation but has no good arguments against the system; instead he rants on about "liberty" and how bad the idea of owning and being owned makes him feel. The villain, in contrast, offers reasoned arguments in favor of the system. In this scene he asks Cord to remember the starving poor of Cord's time and how incorporation would have been a vast improvement:
"What if," answered Hektor, without missing a beat, "instead of giving two, three, four dollars a month for a charity's sake, you gave ten dollars a month for a 5 percent share of that kid's future earnings? And you, of course, get nothing if the kid dies. Now you have a real interest in making sure that kid got that pair of shoes you sent. Now it's in your interest to find out if he's going to school and learning to read and write. Now maybe you'll send him that box of old clothes you were thinking of throwing away. Under your system you write a check and forget about the kid, who'll probably starve anyway. Under our system, you're locked into him.
…the real benefit comes about when those 'evil, selfish, horrible corporations' get involved. How long will it take for a business to realize that there's a huge profit to be made in those hundreds of millions of starving children?…Imagine a world where a bank gives a loan to a corporation to build a school, hospital or dormitory. Not because its the right thing to do; who cares! They'd do it because it's the profitable thing to do. And because of that, my system, not in spite of greed and corruption and incorporation, but because of it, will work better than yours in any time period with any technology you choose."
So who do you stand with, JC or Hektor?
Hat tip to Robin Hanson for lending me the book and from whom I cribbed the description of ownership rights. Hanson offers other thoughts on the novel. And here are earlier comments from Reihan Salam.
Does Uruguay have multiple currencies? — hail Heinrich Rittershausen!
I'm holding back my post on mandates and penalties until comments are back up again. In the meantime, I have read the following:
Back in June of 2009, Uruguay embarked on a nationwide experiment with complementary currencies – a plan that evolved from a number of local trials of the alternative currency system in that country. The name of the currency is officially the ‘liquidity network”, but is known locally as the “charrua“.
Does that not sound like something out of a Borges story? The summary is this:
The system allows small- and mid-sized businesses to lend to each other, with debts being backed by the production value and assets of the lender.
The important fact is this:
…the charrua will be accepted for all debts, public and private. This means that taxes will be payable in both pesos and charrua (and I believe in US dollars, as well).
You'll find another description here. As I understand it, the system treats some corporate debt assets as money-like in a number of relevant ways, possibly to stimulate aggregate demand. Can it be that Uruguay has a version of Hayek's competitive currencies proposal, albeit without complete free entry? If you know more about this, do please email me. Googling "uruguay charrua moneda" doesn't yield much.
Here is a short article on Heinrich von Rittershausen.
For the hat tip I thank CheapSeatsEcon. Here is their graphic art for MR.
Addendum: Eapen Thampy sends me more.
Is there a case for a VAT?
I outlined it yesterday, to a small group at GMU. My tale went as follows:
1. The United States is on an unsustainable fiscal path.
2. For whatever reason, long-term interest rates don't reflect this problem. There will either be a sudden collapse of demand for government securities, or the current market already is figuring we will get a VAT. Either way it is more revenue for the government or a Greece-like scenario writ large.
3. I would prefer spending cuts, but voters seem too irrational to be willing to cut spending; here the libertarian argument comes back to bite us on the bum. They might be willing to cut spending once a financial crisis arrives (though maybe not), but then there will be days or only hours for decisive action.
4. We could, for now, wait and postpone fiscal reform. That means encountering a sudden collapse some number of years from now. We will then clean up the budget in some way, but under a TARP sort of mood rather than what we might do today.
5. We'll get a better deal, and make wiser decisions, if we do it today rather than in a panic. Plus another financial crisis would prove deadly to both the budget and to the quality of economic thinking.
6. There exists a credible bipartisan deal which involves at least half the VAT revenue for deficit reduction, combined with cuts, or slower increases, in marginal tax rates on income and perhaps an elimination of the corporate income tax. Spend some of the rest on health care for the poor, if that is the deal on the Democratic side.
I am by no means convinced this argument is correct but I would like to hear the strongest arguments against it. No one I talked to succeeded in defeating it, other than mentioning they don't like the idea of more revenue for the government. You will notice I structured the argument to be as neutral on the "left vs. right" question as possible.
You'll notice the use of a pivot here: the common "right-wing" views that a fiscal crisis would be awful, voters are irrational, and governments make bad decisions in panic times, are used to favor a VAT.
I wonder: how many people agree with this argument, but they are unwilling to say so because they don't want to weaken their bargaining position if and when a "deal" is put on the table.
Addendum: You'll notice that on Sunday Greg Mankiw mentioned that a VAT might be the best of available alternatives.
Health insurance and mortality follow-up
On health insurance and mortality, you'll find Megan's further thoughts (which I agree with) here (and now here). Neither of us is saying the real net effect is zero. Also check out Matt, Ezra, Austin Frakt, all of whom make good points.
Overall I'd like to see more numbers in the health care debate. If the Obama plan spends $90 billion extra a year on coverage and saves/extends 10,000 lives a year (a plausible estimate, in my view), that is $9 million a life, a rather underwhelming rate of return. That's a very gross comparison because life extension is not the only benefit and the $90 billion is not the only cost. Still, as a starting point for analysis I don't think it makes the plan look better. Keep also in mind that many of the newly covered people are bumping others back into the queue, since the overall supply of medical care isn't going up and may even be declining.
If you did a simple cost-benefit comparison, the Obama plan vs. a simple extension of Medicaid, more R&D through the NIH, and some targeted public health expenditures, I believe the latter would win hands down. And the latter seems more politically feasible too. It avoids the mandate, the unworkable and ridiculously low penalties for those who don't sign up for insurance, and the awkwardly high implicit marginal tax rates imposed by the subsidy scheme. It probably involves fewer corporate and "back room" deals.
In its favor, the Obama plan makes it easier to become an entrepreneur without losing health insurance coverage. I doubt if that's enough to swing the balance, but in any case it's worth thinking about.
Please don't argue that the Obama plan saves money. Even if you believe that (I don't), here we are talking about the marginal impact of one subcomponent of the overall plan. That subcomponent does cost money.
When it comes to the Obama plan, the easy targets are stupid or hypocritical Republicans. The hard target is why the plan should beat the alternative reforms I've outlined above or perhaps other ways of spending the money. I'd like to see more people take on the hard target rather than the easy.
The Politics of Cap and Trade
Good overview in the NYTimes on the politics of cap and trade. The bottom line:
How did cap and trade, hatched as an academic theory in obscure
economic journals half a century ago, become the policy of choice in
the debate over how to slow the heating of the planet? And how did it
come to eclipse the idea of simply slapping a tax on energy consumption…
The answer is not to be found in the study of
economics or environmental science, but in the realm where most policy
debates are ultimately settled: politics…Cap and trade…is almost perfectly designed for the buying
and selling of political support through the granting of valuable
emissions permits to favor specific industries and even specific
Congressional districts.That is precisely what is taking place now in the House Energy and Commerce Committee…
Here is how Tyler and I put it in Modern Principles: Microeconomics
With a tax, firms
must pay the government for each ton
of pollutant that they emit. With pollution
allowances, firms must either use
the pollution allowances that they are
given or if they want to emit more they
must buy allowances from other firms.
Either way, firms that are given allowances
in the initial allocation get a
big benefit compared to having to pay
taxes. Thus, some people say that pollution
allowances equal corrective taxes
plus corporate welfare.
That’s not necessarily the best way of
looking at the issue…
…To make progress against global warming, may require building
a political coalition. A carbon tax pushes one very powerful and interested
group, the large energy firms, into the opposition. If tradable allowances are
instead given to firms initially, there is a better chance of bringing the large energy
firms into the coalition. Perhaps it’s not fair that politically powerful
groups must be bought off but as Otto von Bismarck, Germany’s first chancellor,
once said,”Laws are like sausages, it is better not to see them being made.”
We can only add that producing both laws and sausages requires some pork.
Careful readers may recognize a friendly jab at a competitor.
Why the banking sector is hard to fix
Here is my latest column, excerpt:
The second set of solutions involves taking control of insolvent banks, either by nationalizing them or declaring them bankrupt. In the past, the Federal Deposit Insurance Corporation has used the model of rapidly shuttering failed banks, and it has usually worked.
Many
analysts cite Swedish bank nationalization, from the early 1990s, as a
model, because the Swedes later reprivatized these banks and resumed
economic growth.
But Sweden nationalized only two banks. And the
Swedish banks were much smaller and easier to run than the largest
United States bank holding companies, which combine a wide range of
complex international businesses, commercial paper operations, derivatives trading and counterparty commitments.
It
is quite possible that the reputation of a nationalized bank would be
so impaired that it would incur even greater losses as its web of
commercial dealings collapsed. These far-reaching commitments are a
reason that the F.D.I.C. model of rapid shutdowns cannot be applied so
easily here.
The most obvious problem with nationalization is the
risk of contagion. If the government wipes out equity holders at some
banks, why would investors want to put money into healthier but still
marginal institutions? A small number of planned nationalizations could
thus lead to a much larger number of undesired nationalizations.
On top of that, the government doesn’t have the expertise to run large bank holding companies like Citigroup.
There is the danger that caretaker managers, with bureaucratic
incentives, will never return the banks to profitability. And
restrictions on executive pay, already enacted into law, will make it hard to hire the necessary talent.
In
the meantime, there would be increasing pressure to politicize lending
decisions – for instance, by requiring loans to the ailing automobile
industry. Talk of taxpayers capturing an “upside” is probably
unrealistic.
The plight of the American International Group,
the giant insurer, provides a cautionary tale. The government has
already effectively nationalized A.I.G., but after a government
commitment of $150 billion, the company’s losses continue to mount, and
there is no simple way to either manage it or split it up. If the
government cannot run that bailout very well, how can it run major
banks and nurse them back to profitability?
Nationalization
also puts bank debts on the balance sheet of the government without
restoring bank solvency. Once the government takes over, it is hard to
reorganize the debts of these companies without damaging the
government’s own creditworthiness and spreading the insolvency to bank
creditors. Yet if the banks are insolvent, paying off the creditors may
cost trillions.
It is becoming increasingly clear that the question is not whether to nationalize but rather whether we can afford to make whole long-term bank creditors. Megan McArdle has some thoughts. How much do we gain by transferring the losses away from banks and toward Europeans, insurance companies, and pension funds? If the worst-case scenarios really are true — and they may be — that is the next question on tap. It is of course a very ugly question.
Understanding Fiscal Policy During the Great Depression
My little spat with with Rauchway regarding unemployment during the Great Depression draws in Paul Krugman. Krugman doesn’t respond to any of my arguments but he does give us the old line that fiscal policy didn’t fail during the Great Depression it wasn’t tried.
Now, you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. Properly measured, that is, by using the cyclically adjusted deficit, fiscal policy was only modestly expansionary, at least compared with the depth of the slump. Here’s the Cary Brown estimates, from Brad DeLong…Net stimulus of around 3 percent of GDP – not much, when you’ve got a 42 percent output gap.
Now there is actually a lot of truth to this but the way in which Krugman, Rauchway, DeLong and others present this point is esoteric and likely to mislead even many economists. What Krugman seems to be saying is that the government didn’t spend enough during the thirties (Rauchway, who also cites Cary Brown, says directly "there was never enough spending to achieve the desired effect.") Yet federal spending during this time increased tremendously. So what is really going on? The answer is actually quite simple.
During the Great Depression federal expenditures increased tremendously but so did taxes. Thus, the reason spending was not stimulative was not that spending wasn’t tried it’s that taxes were also raised to prohibitive levels. But don’t take my word for it. Read Cary Brown (JSTOR) whom Krugman, Rauchway, DeLong all cite but none of whom quote at length. Here is Brown:
The primary failure of fiscal policy to be expansive in this period is attributable to the sharp increases in tax structures enacted at all levels of government. Total government purchases of goods and services expanded virtually every year, with federal expansion especially marked in 1933 and 1934. [But] the federal Revenue Act of 1932 virtually doubled full employment tax yields…
…the highly deflationary impact of this tax law has not been fully appreciated…The Revenue Act of 1932 pushed up rates virtually across the board, but notably on the lower and middle income groups….Personal income tax exemptions were slashed, the normal-tax as well as surtax rates were sharply raised, and the earned-income credit equal to 25 percent of taxes on low income was repealed. Less drastic changes were made in the corporate income tax, but its rate was raised slightly and a $3000 exemption eliminated. Estates tax rates were pushed up, exemptions sharply reduced, and a gift tax was provided. Congress toyed with a manufacturers’ sales tax, but finally rejected it in favor of a broad new list of excise taxes and substantially higher rates for old ones….
The Revenue Act of 1932 was followed by many further tax increases (e.g. Brown notes "…social security taxes began in 1937 to exert a pronounced effect…") many of them, under pressure from the Huey Long wing, designed to "Share our Wealth." Here is a graph of the highest marginal income tax rate which went from 25% to 79% between 1929 and 1940 and here is a graph of the lowest marginal income tax rate which (from a low base) increased by a factor of 10. (Hat tip to Carpe Diem).
Thus, an accurate portrayal of fiscal policy during the Great Depression – entirely consistent with Krugman – is that we had much greater spending, much greater taxes and not much economic stimulus. And if supporters of the New Deal argue that fiscal policy was only "modestly expansionary" then it’s quite reasonable to think that once we take into account the supply side effect of taxes and the increase in regime uncertainty then the net effect might even have been contractionary.