If Republicans have their way, taxes will increase next year by $120 billion. Republicans in favor of tax increases? Sadly, yes.

Last year the payroll tax on employees was cut from 6.2% to 4.2%, a policy that President Obama supported. Economists from across the political spectrum have also expressed support for a payroll tax cut including Keynes, Mankiw, Robert Reich, Dani Rodrik, Tyler and myself. The CBO scored a payroll tax cut as among the most effective policies for increasing employment, although it would have been better to cut the employer side of the tax.

The payroll tax cut was temporary, however, and is scheduled to expire next year. So who is in favor of increasing taxes?

Many of the same Republicans who fought hammer-and-tong to keep the George W. Bush-era income tax cuts from expiring on schedule are now saying a different “temporary” tax cut should end as planned. By their own definition, that amounts to a tax increase.

The tax break extension they oppose is sought by President Barack Obama. Unlike proposed changes in the income tax, this policy helps the 46 percent of all Americans who owe no federal income taxes but who pay a “payroll tax” on practically every dime they earn.

House Republicans appear to be most in favor of increasing taxes although some Republican Senators have also said they want to raise taxes. The failure of Republicans on this issue lends credence to Paul Krugman’s arguments:

How can [Repubicans not want to cut the payroll tax], when Republicans love tax cuts? The answer is, they don’t. They love tax cuts for the rich. Tax cuts for ordinary workers, many of whom will be those hated lucky duckies whose incomes are too low to pay income tax, are if anything something Republicans dislike.

Also, the GOP is against any idea that (a) comes from Obama (b) might help the economy before the 2012 election.

To their credit Romney and Gingrich are more supportive:

Former Massachusetts Gov. Mitt Romney did not flatly rule out an extra year for the payroll tax cut, but he “would prefer to see the payroll tax cut on the employer side” to spur job growth, his campaign said.

Former House speaker Newt Gingrich said Republicans will fall under increasing pressure to extend the payroll tax cut. If they refuse, he said in a recent speech, “we’re going to end up in a position where we’re going to raise taxes on the lowest-income Americans the day they go to work.”

Unfortunately, outside of the White House, Democrats are also not pushing for an extension of the tax cut.

Many Democrats also are ambivalent about Obama’s proposed tax cut extension. They are more focused on protecting social programs from deep spending cuts.

It’s a bad idea to raise taxes on working Americans in a weak economy and with interest rates so low the gains from reducing the deficit from current spending are low. Our political system is so dysfunctional, however, that Republicans may fail to support effective tax cuts precisely because a Democratic President regards them as important for economic growth.

Hat tip: Erik Brynjolfsson

Here is my latest column, some of it will sound familiar to readers of TGS:

One bias in the economic statistics — which never shows up in published revisions — is embedded in the health care sector, where third-party payments, subsidies and care quality are hard to monitor and measure. A result is that a dollar spent on health care does not necessarily mean a true dollar’s worth of value added. The United States spends more per capita on health care than any other country, yet without producing measurably superior results. To the extent that some of these expenditures are wasteful, the gross domestic product and productivity numbers overstate economic growth.

Here’s another problem: Expenditures on the military and domestic security have risen since 9/11, but those investments are intended to neutralize external threats. Even if you agree with this spending, it generally doesn’t produce useful goods and services that raise our standard of living.

One of the most commonly cited productivity numbers describes per-hour labor productivity, but this, too, has intrinsic flaws. Labor force participation has been falling for more than a decade, and low-skilled workers are leaving the work force in disproportionate numbers. Taking some lower-paying jobs out of the mix will raise the measure for average productivity, which is hardly the same as increasing the economic gains from a given set of workers or, for that matter, from putting more people to work by making them more productive.

There is more at the link, including points which do not appear in TGS.

Let’s say the U.S. becomes another Japan or for that matter let’s say Japan has become Japan.  Still, we all know that capital depreciates.  That raises the return on replenishing and rebuilding the capital stock.  Even though wealth is falling, it raises the marginal rate of return on investment.  Which in turn should spur aggregate demand and also credit creation.  At some point you have to get the roof fixed.  If alien invasion can work, what about a slower rotting away of the same output?

That’s a slow, ugly and painful way to end a downturn, but the deeper question is whether it will work at all.  It doesn’t seem to have worked in Japan and they’ve had enough time for a lot of capital to rot away. This paper measures depreciation rates (for America) and estimates that physical capital, without repair, has an average survival time of thirteen to sixteen years.

Why has it not worked in Japan?  I see (at least) two options:

1. The boost to aggregate demand has to be based on sustainable increases in real wealth, rather than deteriorations in wealth.  Maybe so, but then monetary and fiscal policy won’t work either, or more accurately the fiscal policy will work only if the resulting outputs are fairly valuable.  Keynesian pyramids won’t do the trick.  Of course, people who stress “the broken window fallacy” will likely side with this response.

2. As the capital stock depreciates, it is repaired slowly but steadily, enough to keep the MP of K from rising very much and thus there is enough capital replacement to thwart recovery.  (People who stress “the broken window fallacy fallacy” may prefer this option!)  That sounds plausible, but if I think about it long enough my worries multiply.

The argument implies that the real problem is low and enduring real rates of return, and not simply that a monetary trick is distorting those rates of return.  The marginal real rate of return keeps on creeping up and the decisions of investors keep on pushing it back down, but only so much; apparently the economy wants to stay in this low output, low rate of return corridor.  That’s closer to a TGS story than to a “we can fix this with AD” story.  (Alternatively, do you wish to argue that there is a collective action problem with the slow accretion of the “investment of repair” and that we should tax it and save it all up for one big bang of recovery?  I can see the model but does anyone actually believe this?)

Does the argument imply a funny non-linearity?  It implies that, say, a stimulus of $2 trillion will be more than twice as effective as a stimulus of $1 trillion.  Bombs falling are better than slow rot, and so on.  That could be true, but I see a lot of hand-waving on the issue.  It would seem to boil down to psychology and multiple equilibria (“the confidence fairy”?) and thus I am suspicious of very definite predictions along this particular dimension.  Of course, sometimes bombs really wreck a place; ever been to Bosnia?

It is worth pondering our views on capital depreciation and whether they are consistent with our other beliefs about macroeconomics and also about Japan and why it has remained in its downturn so long.

By the way, measured private investment has not really risen since 1998.

Timeshare Backyard is a grass lot in Manhattan’s Lower East Side that is rentable for $50 per hour (see a Reuters report on the project). Renters can specify added cost options like a slip-n-slide, barbecue grill, or live band–though they’ll have to act quickly as the backyard is almost fully booked through August 28, when the endeavor comes to an end. Timeshare Backyard is a project by The Participation Agency, a rather mysterious New York City brand consultancy.

Here is the link, with a good photo (very enticing), a barbecue grill is extra, and for the pointer I thank Selena M.  After August 28, the rental offer goes away.