Archive for the Category Fiscal policy


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.

Screen Shot 2017-03-28 at 5.40.39 PM

Brazil’s austerity experiment

Scott Alexander recently had this to say about a Vox article on Brazil:

Brazil has just passed the most extreme austerity measure in history in the middle of a recession, locked in with a clause making it impossible to repeal for 10-20 years. A…bold…choice. If nothing else, it’ll provide good data for future generations of macroeconomists. Register your predictions now!

I predict success, in the sense of faster growth.

I doubt, however, that the experiment will actually prove very much, as I know of no theory that predicts Brazil’s austerity would cause slower growth, and I know of no evidence that Brazil will in fact engage in extreme austerity.

Brazil has high interest rates and high inflation, and hence even Paul Krugman would not regard fiscal austerity as being contractionary in Brazil. Instead, the Brazilian central bank determines the rate of Brazil’s nominal GDP growth.

Might austerity hurt the supply-side of Brazil’s economy?  I suppose anything is possible, but it’s hard to see how.  Unlike China, Brazil’s high government spending goes to things like public pensions, not infrastructure.  In addition, Brazil’s government sector spends much more (39.1% of GDP) than other countries that seem to have at least as productive supply-sides, such as Chile (23.2%), Mexico (26.6%), Costa Rica (18.2%), Uruguay (32.6%), and Australia (35.3%).  It’s not clear to me that spending 39.1% of GDP makes your economy more efficient, especially if very little of the money goes to infrastructure.  To be fair, Venezuela spends 40.1%.  So Brazil is the not highest spender.

Perhaps the austerity will fail by increasingly inequality.  Brazil is already very unequal, although a bit less so than 20 years ago.  But that depends on which programs are cut.  In the past, government spending in Brazil has been regressive, mostly going to relatively well off government employees and pensioners.  Unfortunately, the Vox article that Scott links to doesn’t tell us where the cuts will come.

Nor does it say that there will be any cuts at all:

Americans worried that Donald Trump will try to shred the nation’s social welfare programs can take some grim comfort by looking south: No matter what Republicans do, it will pale in comparison with the changes that are about to ravage Brazil.

On Thursday, a new constitutional amendment goes into effect in Brazil that effectively freezes federal government spending for two decades. Since the spending cap can only increase by the rate of inflation in the previous year, that means that spending on government programs like education, health care, pensions, infrastructure, and defense will, in real terms, remain paused at 2016 levels until the year 2037.

A few comments:

1.   Notice that no specific cuts are announced.

2.  A constitutional amendment in Brazil doesn’t have the same meaning as in the US.  It’s more like legislation.  When a government engages in Augustinian promises to do something virtuous, but only far out in the future, it’s a pretty good indication that they have absolutely no intention to fulfill their promise.  Many governments have long range promises to balance the budget, which no one seriously expects to be enacted.  I hope the Brazilians will hold real spending fixed for 20 years (to become a bit more like Chile), but it seems very unlikely that they will do so.

The Vox article is highly misleading in all sorts of ways.  For instance, did you know that Brazil is one of the most highly taxed countries in the developing world? If you did not, you probably would not acquire that information by reading this from the Vox article:

While the amendment does a great deal to limit the expenditure of government funds, it doesn’t do anything to directly address how to generate them directly: taxes.

“The major cause of our fiscal crisis is falling revenues,” Carvalho says, noting that the populist Rousseff, known for her support for government programs, cut taxes for the corporate sector during her time in office over the past few years in an attempt to avoid losing public support.

Carvalho says taking an ax to spending is coming at the expense of discussing “taxing the very rich, who do not pay very much in taxes, or eliminating tax cuts that have been given to big corporations.”

Brazil’s tax code is extraordinarily generous to corporations and the wealthy, and helps buttress its status as one of the world’s most unequal countries. Brazil’s highest income tax rate is just 27.5 percent — for comparison, US tax rates go up to about 40 percent, and in Scandinavia they can exceed 60 percent.

The Vox article doesn’t really provide much context.  Readers are not told that a decade of socialist misrule has driven Brazil into a painful recession. Perhaps Brazilians have noticed the fact that Chile and Mexico are not in depression, and do not have as bloated a government sector.  Maybe they don’t think it’s wise to have a government sector that is almost as large as in Venezuela.

PS.  Over at Econlog I discuss the peculiar views of Trump’s new economic advisor