Archive for the Category Misc.


Rubio-Lee is great, so why not make it even greater?

If the tax reform proposal of Rubio and Lee were to pass it would easily be the best thing the Federal government has done since the civil rights laws of the 1960s.  And yet we see the usual suspects like Jonathan Chait trashing the bill.  Instead Chait should have said that with one tweak the bill would be awesome, and Dems like Elizabeth Warren should be racing to support the general idea.  I’ll get to the minor tweak in a moment, but first some of the good things it does:

1.  Ends the marriage penalty.

2.  Ends the taxation of capital income.

3.  The corporate tax becomes based on income earned in the US, (which is the approach used by most other countries.)  The rate would be similar to European tax rates.  Interest would no longer be expensed.  (Recall that interest income is no longer taxed (point #2), so it balances out.)

4.  Capital investments are expensed, no depreciation schedules.

5.  Ends most itemized deductions.

6.  AMT eliminated.

I haven’t been this excited since I was single!

Is it perfect?  No, there’d still be deductions for health insurance and mortgage interest and charitable deductions. However their statement says those issues also need to be addressed.  They should also treat everyone as single, to end the marriage bonus.

Under Rubio/Lee, someone like me with no mortgage would have the following 1040:

Wage income minus charitable contributions = taxable income.

That’s it.

The tax code would no longer hammer savers and married people.  It basically turns the income tax into a progressive consumption tax.  Isn’t a progressive consumption tax what liberals have been calling for?

Now for the supposed flaws.

1.  It’s not progressive enough.

2.  It doesn’t raise enough revenue.

There’s a very simple fix for both problems—add a third bracket!  The proposal calls for a 15% rate up to $75,000, and 35% above that level (or above $150,000 for couples.)  Simple solution—add a 50% rate for income above $250,000 (or $500,000 for married people.)

A note on progressivity:

Liberal arguments on the progressivity of various tax changes are basically worthless. Ignore everything you read, as they are using “income” as the benchmark of economic well-being.  Thus suppose I earn $100,000 a year for 20 years, and then sell my house for a capital gain of $500,000.  (I live in a two family, so I must pay taxes on the gain.) Liberals would have you believe I am suddenly “rich” in the year of the sale, with an income of $600,000.  That’s nonsense for two reasons.  The actual gain occurred gradually over 20 years.  And adding wage and capital income is as nonsensical as adding blueberries and apples, and calling it the number of “fruit.”  Taxes on capital income are double taxing the same earnings.

Conservatives might complain that a 50% top rate is too high.  The current top rate is 43.4% (don’t believe the liars who claim it’s 39.6%.)  But that is the top rate for an income tax system.  Rubio and Lee are proposing that we switch to a consumption tax system.  Consumption is less than income, especially for the rich, or should I say the “rich.” (How much will I consume the year I finally sell my house?  Not $600,000.)  So the top rate should be higher with any switch to a consumption tax.  Indeed you can argue that people with consumption levels in the $100s of millions per year should face an even higher tax rate.  And don’t tell me they “deserve” the 500 yachts earned through legal barriers to entry like intellectual property laws, there is no such thing as “deserve” in a cold heartless universe composed of nothing but subatomic particles, where most people are born into peasant families in places like Nigeria and Bangladesh.  If conservatives won’t be hardheaded realists, who will be?

Yes, I’d prefer a lower set of tax rates.  I wish our total government spending were 20% of GDP, like the 4 Asian tiger economies, not the 35% to 40% we seem stuck with.  I wish we’d eliminate the tax deductibility of mortgage interest and health insurance, which would allow for lower rates than what I’m proposing.  Ideally the government would simply withhold income taxes, like they do with the payroll tax.   No 1040 forms to fill out.

The other potential flaw in Rubio and Lee is business/self-employed income, and especially preventing tax avoidance.  An alternative way to a progressive consumption tax would be to treat all savings and investment in a 401k-type structure, taxing income only when it is consumed.  That would make it much harder for the hedge fund guys and the self-employed to avoid taxes.

PS.  I have a new post on inequality at Econlog.

HT:  TravisV

The WSJ discovers long and variable leads

Jared Pincin directed me to a new example of long and variable leads, from the Wall Street Journal:

The European Central Bank begins its much-anticipated purchases of sovereign bonds on Monday, and ECB President Mario Draghi says the program known as quantitative easing is working before it has even begun. He’s right about that, as strange as it sounds, and therein lies the paradox of Europe’s dive into QE: It may already have had the most effect it is going to have through Mr. Draghi’s salesmanship and Europe’s will to believe.

Recall how the ECB got here. Demands have grown for years for an ECB program to match the bond purchases by central banks in the U.S., U.K. and Japan. Mr. Draghi started hinting at a willingness to play along in his August speech at the global central banking conference at Jackson Hole, Wyo. By the time Mr. Draghi in September announced a plan to buy private securities, investors viewed it as a stepping-stone to buying sovereign debt too.

As investors came to view QE as inevitable, prices responded, especially the price of the euro. As a result of Mr. Draghi’s open-mouth operations to talk down the euro—coupled with an expectation that interest rates might rise soon in the U.S.—the euro has declined steadily against the dollar and other currencies. On Thursday it hit an 11-year low of $1.10, compared to about $1.40 last summer.

In other news, the rapid improvement in the labor market, which began in early 2013 with fiscal austerity and accelerated in 2014 with the end of extended unemployment insurance benefits, continues into 2015.  Unemployment is now down to 5.5%, from 10% in October 2009 and 8% in early 2013.  Job growth continues at a rate far faster that the growth of the working age population.  Conservative structuralists and inflation fearmongers were wrong, as were liberal austerity fearmongers and those who denied extended UI insurance affected unemployment.  Who was right?  The same group that’s been right about almost everything else since 2008.

Monetary policy drives NGDP, which drives the business cycle.  When you pay people not to work, you get less work.  What a pity that Keynesian economics emerged from the 1930s, instead of Hawtreynomics.

A new argument against libertarianism

David Henderson has a post discussing a Henry Farrell piece on the Silk Road. Farrell shows that when markets like drugs are made illegal lots of nasty side effects can occur.  He concludes that this is an argument against libertarianism:

The libertarian hope that markets could sustain themselves through free association and choice is a chimera with a toxic sting in its tail. Without state enforcement, the secret drug markets of Tor hidden services are coming to resemble an anarchic state of nature in which self-help dominates.

Paul Krugman agrees:

a truly brilliant essay . . . an awesome read.

OK everyone, take a deep breath.  Let’s keep the comment section civil.  Krugman is a distinguished Nobel Prize winner.  This is the world we are condemned to live in.  I think Deirdre McCloskey best expressed my frustration.

I don’t care how one defines capitalism, as long as it’s not defined as evil incarnate.

Unfortunately, everyone from the Pope to Paul Krugman increasingly seem to prefer exactly that definition.

Real wage bleg

Paul Krugman has a column discussing the plight of America’s workers:

The point is that extreme inequality and the falling fortunes of America’s workers are a choice, not a destiny imposed by the gods of the market. And we can change that choice if we want to.

We all know that workers have done very poorly in recent decades, but exactly how do we know this?  Michael Darda sent me an email pointing out that real wages have been rising since about 1994 (ironically when NAFTA was enacted), after falling during previous decades.  Here’s a graph showing hourly real wages, where I use the wage series excluding the higher paid managers.  I presume that’s the series people are discussing. I use the PCE price index, which the Fed seems to think is best (I find all price indices to be equally arbitrary.)

Screen Shot 2015-03-04 at 12.51.33 PM

Obviously I must have made some sort of mistake.  Which data series are the Democrats using to get so hysterical about real wages in America?

PS.  Or maybe I misunderstood the complaint.  Maybe the left thinks average real wages are fine and that inequality is the problem.  In that case workers making more than average (more than $20.80/hour) should see their wages cut while those making less than average should see their pay increase.  Good luck with that platform, given that a sizable chunk of low wage workers are non-voting teens and immigrants.

PS.  Evan Soltas is back blogging, and has some very interesting new posts, including one on wage compression.  Soon I’ll discuss his post on the cost of holding currency.

The great unwashed masses (there’s weakness in numbers)

Over at Econlog I have a new post pointing out that back in 2006 New Keynesians like Brad DeLong believed in monetary offset.  I should clarify one point, however. I am basically talking about the New Keynesian elite, the people who follow the latest developments in macroeconomics.

A paper by Daniel Klein and Charlotta Stern (2006) points to a 2003 survey done by the AEA that showed that most economists favored using fiscal stimulus for purposes of fine-tuning the economy.  Read that again, I didn’t say “most Keynesians,” I said most economists.  Fiscal skeptics like Krugman and DeLong were right-of-center economists back in those days.

The problem here is that most economists get their ideas on macroeconomics from studying the Keynesian cross model in EC101, and also using common sense (obviously if G goes up, then C+I+G must go up.)  But by 2006 the Keynesian cross model was horribly outdated, and common sense is almost useless in economics.  Indeed you could argue that it is a lack of common sense that separates the elite economists like Krugman from their mediocre colleagues.

In a 1997 article Paul Krugman called those holding this consensus view “Vulgar Keynesians.” Here Krugman makes the same mistake I made (when discussing the paradox of thrift and the widow’s cruse.):

Such paradoxes are still fun to contemplate; they still appear in some freshman textbooks. Nonetheless, few economists take them seriously these days. There are a number of reasons, but the most important can be stated in two words: Alan Greenspan.

After all, the simple Keynesian story is one in which interest rates are independent of the level of employment and output. But in reality the Federal Reserve Board actively manages interest rates, pushing them down when it thinks employment is too low and raising them when it thinks the economy is overheating. You may quarrel with the Fed chairman’s judgment–you may think that he should keep the economy on a looser rein–but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.

Krugman and I both believed that there were “few economists” who stilled believed that nonsense back in the late 1990s, when in fact most economists believed that nonsense as late as 2003.  Krugman had the Pauline Kael problem, he didn’t know most economists; he knew Bernanke, Svensson, Woodford and other Princeton economists. My problem was that I didn’t know most economists, I read Bernanke, Svensson, Woodford and Krugman, and assumed they were representative.

Of course Krugman has now joined the vulgar Keynesians, citing the new circumstances of near-zero interest rates.  I suppose he finds strength in numbers, such as the 350 economists who warned that fiscal austerity in 2013 would produce a recession.  Indeed I’ve seen Krugman cite a poll of 50 economists, almost all of which thought fiscal stimulus had a positive effect.

Unfortunately, most economists are far behind the times in macro theory.  By joining up with most economists, Krugman has allied himself with the least informed segment of the profession.  It would be like suddenly becoming a protectionist, and citing the fact that 90% of Americans think Chinese imports cause unemployment.  Come to think of it, isn’t Krugman also making that argument?

Economics is the queen of the counterintuitive sciences.  And no parts of economics are more counterintuitive than stabilization policy and trade.  Krugman was wrong in thinking the majority agreed with him in 1997.  But Krugman’s right that he’s now in with the overwhelming majority of economists.  I’m in the tiny, tiny minority of economists who think the economy has needed demand stimulus but that fiscal stimulus is ineffective.  But this is one case where there is weakness in numbers. I’m perfectly happy being in a tiny minority, if it’s the same minority that Krugman and DeLong and the other elite NKs belonged to a decade ago.

PS.  To be fair, the 350 warned about fiscal austerity slightly worse than the $500 billion reduction in the deficit in calendar 2013 that actually occurred, but still . . .