Archive for the Category Fiscal policy


I don’t buy the Economist for investment tips

I view The Economist as the best magazine in the world, which is why I like to pick on them so much.  I recently came across a couple examples of faith-based reasoning at the Economist.  Here’s a piece on the recent recovery in Japan:

JAPAN’S economy has been so sickly for so long that many have stopped looking for signs of recovery. And yet, on close examination, they are there. Years of massive fiscal and monetary stimulus seem to be having some effect. Unemployment is below 3%—the lowest rate in 23 years—and wages are rising, at least for casual workers. Prices are creeping up, too, albeit by much less than the Bank of Japan’s 2% inflation target.

Yikes!  Massive fiscal stimulus?  In fact, Abenomics has involved a sharp contraction in fiscal policy, mostly due to a large increase in their national sales tax.  Budget deficits are shrinking dramatically.  Yes, fiscal policy was expansionary in the 1990s and early 2000s, but that corresponded to perhaps the worst 19 year performance in aggregate demand ever seen in a developed economy, with NGDP actually falling between 1993 and 2012.  It’s only since the beginning of 2013 that Japanese NGDP has shown signs of life:

Then I came across this headline on Bitcoin:

Manias, panics and Initial Coin Offerings

Crypto-coin mania illustrates the crazy and not-so-crazy sides of bubbles

In fact, it would be hard to find a more perfect refutation of the bubble hypothesis than Bitcoin. And yet somehow The Economist sees Bitcoin as a good example of a bubble.

Recall that back in 2012 when Bitcoin was trading at $12, the Economist was already calling it a bubble:

These curious capabilities make Bitcoins a combination of a commodity and a fiat currency (creating the coins is referred to as “mining” and they have value only because people accept them). But boosters inflated a Bitcoin bubble. Shortly after the currency launched, articles spread around the internet arguing that Bitcoins would protect wealth from hyperinflation and that early adopters would make a fortune. The dollar price of a Bitcoin currency unit climbed from a few cents in 2010 to a peak of nearly $30 in June 2011 (see chart), according to data compiled by Mt Gox, a popular online Bitcoin exchange. Inevitably, the currency then crashed back down, bottoming out at $2 in November 2011.

Inevitably?  Do the writers at The Economist have no sense of shame?  It’s bad enough that they prevented me from becoming filthy rich by purchasing bitcoin back in 2012, but after being spectacularly wrong about it being a bubble in 2012, they continue to make the same predictions over an over again, year after year.  Bitcoin could fall 99% tomorrow and the Economist would still be completely wrong about it being a bubble.  Please, I beg you, just stop trying to predict asset prices.  I don’t buy the Economist for investment tips.

As each day goes by the four anti-EMH arguments from 2009 (when I started blogging) look weaker and weaker.  NASDAQ 5000?  It just soared past 6700.  (Roughly 5000 in real terms)  Housing prices?  They’re soaring again.  Hedge funds and college endowments outperform?  Not any more.  Bitcoin is a bubble at $30?  Where can I buy some at that price.

But of course none of this will matter.  People don’t believe in fiscal stimulus and bubbles because of the facts, as the evidence strongly refutes these theories.  Rather it seems like soaring prices are a bubble, and it seems like big government spending programs should boost the economy.  Thus people will continue to believe these myths no matter how much evidence piles up against.

PS.  And it’s even worse.  When Bitcoin prices finally plunge (and they will at some point, as all highly volatile asset prices do) then the bubbleheads will think they were right all along, even as they’ve been wrong all along.

It’s hopeless.

That was then, this is now

Consider the following:

Last year they [older evangelicals] flipped from being the voter group most likely to say personal morality mattered in a president, to being the group least likely to say that.

I wonder why?

Or consider this:

Negotiations were still under way on Capitol Hill early this week as Kevin Brady, chair of the House ways and means committee, spearheads work on complex calculations to stay within the limits Congress set for the legislation — an increase in the deficit of no more than $1.5tn over 10 years.

So let me get this straight.  We had a deficit of $666 billion in FY2017 (the work of the devil), and we are in the 9th year of an economic expansion, and consumer confidence is at a 17-year high, and unemployment is 4.2%, and demographics point to rapid growth in the national debt in future decades, and the GOP in its infinite wisdom has decided that now is a good time for another $1.5 trillion expansion in our national debt, on top of the currently unsustainable trajectory?

Remind me about how awful the Obama deficits were?  Freedom Caucus?  Tea Party?  Anyone?

We need tax reform, not tax cuts.

PS.  I enjoyed this—thought you might too:

In a speech, John McCain said the following:

“To fear the world we have organized and led for three-quarters of a century, to abandon the ideals we have advanced around the globe, to refuse the obligations of international leadership and our duty to remain “the last best hope of earth” for the sake of some half-baked, spurious nationalism cooked up by people who would rather find scapegoats than solve problems, is as unpatriotic as an attachment to any other tired dogma of the past that Americans consigned to the ash heap of history.”

That’s a mouthful of a sentence — and an excellent one. But not according to another Arizona Republican, Kelli Ward. John McCormack of The Weekly Standard reported on a campaign event of hers. She said she would Make America Great Again by serving “as a conservative, as a populist, as an Americanist, as a scurrilous nationalist.”

John McCain and Jeff Flake are the old GOP.  It look like scurrilous nationalists such as Kelli Ward are the new face of the Republican Party.  I wonder what Lincoln would think of the fact that it’s now Republicans that view people like Robert E. Lee as patriots.

And let’s not forget Alabama’s embarrassing Roy Moore, who is being endorsed by the so-called “libertarian” leaning GOP senators such as Paul, Cruz and Lee:

“Moore’s attitudes toward homosexual citizens goes far beyond merely not wanting them to have ‘special rights,’ ” wrote Reason’s Brian Doherty, a biographer of the Paul family. “Moore, as he declared from the bench in the that 2002 case, believes all American homosexuals who have a sex life in line with their preferences are for that very reason criminals. The Paul endorsement is a depressing sign of how much personal liberty America’s political class, even the supposedly freedom-oriented ones, are willing to give up in exchange for lip service to tax cuts.”

A GOP that fails to do tax reform, but embraces bigots like Moore is not a pretty sight.  But that’s where we are today.

Après moi le déluge

Somehow Donald Trump ended up in the White House–an outcome that seemed to surprise even him.  Now he needs to figure out what to do next.  (No, the campaign promises don’t provide any sort of coherent guide.)  Early indications are that Trump will try to implement policies that are popular, at the cost of imposing burdens on future generations (via global warming or massive deficits or a health insurance death spiral or a loss of US foreign policy credibility.)

The Financial Times reports that Trump’s proposed tax cuts would balloon the deficit:

The package would be hugely costly if it ever saw the light of day — suggesting that it was more a mechanism for signalling the direction the administration wants to take, rather than a detailed set of proposals. Estimates from the Committee for a Responsible Federal Budget suggest the measures would cost $5.5tn over a 10-year period, with the corporate tax cut the most expensive measure.

The proposal does contain lots of good ideas, such as eliminating the deductibility of state and local taxes (which would hurt me, but is still a good idea.)  It would also eliminate the AMT and death taxes, both long overdo.  Unfortunately, Trump doesn’t seem willing to pay for any of this.  It’s like someone who wants to eat ice cream and skip the vegetables. Trump seems opposed to cutting government spending, and also opposed to proposals such as eliminating the tax deductibility of health insurance and mortgage interest.  He’s also opposed to the border adjustment tax.

[I also oppose the BAT.  But I’d still prefer the Brady bill, despite that provision, as it at least tries to be deficit neutral.  Even better would be a carbon tax, and/or a higher payroll tax on high wage earners.]

In an optimal fiscal policy, the debt/GDP ratio rises during periods of high unemployment and falls during periods of low unemployment.  Trump’s proposal would cause the debt ratio to rise even in good times, and to soar in recessions. And that’s not even accounting for the looming demographic nightmare of boomers retiring.  This is a deeply irresponsible proposal.  Rather that rejecting the proposal, Congress should keep the good stuff and raise additional funds by closing loopholes.  In addition to the ones mentioned above, I’d close the deduction for interest paid by businesses.  Instead, I expect Congress to oppose even the one good idea, ending the deductibility of S&L taxes.  I hope I’m wrong, but I expect a really bad bill to come out of Congress.

PS.  Trump also wants to slash the tax rate for billionaire property developers (like Trump) from 39.6% to 15%, barely half the rate I have to pay.  Sad!

PPS.  Here are some good articles that I don’t have time to blog on:

1.  Why Europe still needs cash

2.  Why trade deficits aren’t about trade

3.  Why China may be growing faster than the official GDP numbers suggest

How bad is the Italian debt situation?

Tyler Cowen recently linked to a John Cochrane post, discussing Larry Kotlikoff’s views on public debt sustainability.  Here’s Cochrane:

(By the way, if you’re feeling superior and taking comfort that Europe will go first off the cliff, Kotlikoff disagrees. Europe’s debts are larger, but their social programs are better funded, so their fiscal gaps are much lower than ours. The winner, it turns out, is Italy with a negative fiscal gap. Answering the obvious question, Kotlikoff offers

“What explains Italy’s negative fiscal gap? The answer is tight projected control of government- paid health expenditures plus two major pension reforms that have reduced future pension benefits by close to 40 percent.”Don’t get sick or old in Italy, but perhaps buying their bonds is not such a bad idea.)

I am a bit skeptical of that claim; so I decided to check with God, er . . . I mean I decided to check with the ultimate arbiter of truth, the asset markets:

Screen Shot 2017-04-24 at 4.13.10 PMAs you can see, Italian 10-year bonds offer considerably higher yields than German, French and Dutch bonds, and even higher yields than Spanish bonds. Italy has a massive public debt (third largest in the world), an economy that has shown almost no growth since 2000, and a very dysfunctional political system (which the voters recently decided not to reform.)

I greatly respect Kotlikoff, and even more so John Cochrane.  But I respect the markets far more than any mere mortal.   So unlike Kotlikoff and Cochrane, I remain relatively pessimistic about the Italian debt situation.

PS.  I am back from 5 days in Turks and Caicos (is there a law in the Caribbean mandating nothing but Bob Marley music at resorts?), and I am starting to get caught up.

I have a new post on Bretton Woods as an example of the guardrails approach to policy, and another post commenting on the French elections.

My guardrails post is intended to address tiresome criticism of NGDP targeting by people who have never bothered to actually read what I have written on the topic. No, neither the current lack of interest in NGDP futures trading nor the risk of market manipulation pose any kind of problem for the system I am actually advocating.  (Unless you believe, “Bretton Woods could not possibly have worked because speculators would have manipulated the market.”)

Ryan Murphy on state and local stimulus

Ryan Murphy has a new piece at Mercatus that discusses the problem of estimating spending multipliers using regional data:

Even if the central bank is perfectly competent and offsets the effects of fiscal stimulus entirely (meaning the multiplier at the national level is zero), these statistical methods when applied to subnational data still calculate the fiscal multiplier to be greater than one. Under conventional assumptions and settings where central banks credibly target certain nominal variables, any multiplier greater than zero should instead be interpreted as one region taking aggregate demand and jobs from another. In other words, a multiplier of greater than zero in one area implies a multiplier less than zero in another.

Unfortunately, most researchers seem to be aware of this problem:

Research employing these methods is published in elite academic journals such as American Economic Review and American Economic Journal: Economic Policy. Very rarely does it seriously address the negative externality problem. If it does, it often implies that states engaging in fiscal stimulus will provide a positive spillover for neighboring states. When the problem is referenced, it is noted as a small caveat deep within the paper. For instance, one paper states in its abstract that $100,000 of public outlays corresponds to 3.8 job years (implying a multiplier greater than one). This article has been cited 133 times as of September 2016, according to Google Scholar. Within the paper, however, the authors write, “given that the results from this cross-state approach do not incorporate equilibrium effects, cross-state multipliers, or the response of the monetary authority, we interpret this multiplier as only suggestive of the national multiplier of policy interest.” This interpretation entirely undercuts their point.

Now that we have a new administration determined to pursue tax reform and infrastructure spending, it’s worth reviewing where monetary offset does and does not apply.  Pundits often confuse the supply-side with the demand-side, when talking about the “growth” effects of “stimulus”.  If the stimulus is demand-side, then monetary offset probably prevents any meaningful effects.  But supply-side policies can still create growth, even with monetary offset.

Infrastructure spending is purely a demand-side policy as long as the infrastructure is still under construction.  Thus one should not expect any immediate impact on growth from spending more on big projects such as highways, bridges and airports. Once an infrastructure project is complete, it may (and I emphasize ‘may’) boost aggregate supply, and hence real GDP growth.  In my view, the supply-side effects of the sort of infrastructure package we are likely to see will be very small.  That doesn’t mean it’s not worth doing, just don’t expect a dramatic boost to GDP growth.

As of now, the GOP is still claiming that it intends to pursue revenue neutral corporate tax reform.  In that case, there would be no demand-side effects, so there would be nothing for monetary policy to offset.  If the tax reform boosts the supply side of the economy, it may also boost real GDP growth.  As with infrastructure, the long run effect may be greater than the immediate impact, as tax reform is likely to lead to more business investment.  In my view tax reform could have a stronger supply side effect than infrastructure spending, albeit still fairly modest in absolute terms.

PS.  I saw that the new Vegas football stadium was approved today.  When these stadium projects are sold to the voters, there are promises of multiplier effects from the spending of tax dollars.  Good luck.

According to Wikipedia, Vegas is just as sensitive to preserving its heritage as Boston:

The stadium as proposed is a domed stadium with a clear roof and silver and black exterior and large retractable curtain-like side windows facing the Las Vegas Strip. There is a large torch in one end that would house a flame in honor of the late Al Davis.[37] MANICA Architecture confirmed on March 28th, 2017 that a full nude strip club would be included into the stadium to honor the heritage of Las Vegas.

Does this project in some strange way remind you of a certain American politician?

Update:  I guess that Wikipedia quote has been corrected.  Shame on me for being so gullible.

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