Jeb Bush recently presented some really sensible ideas on tax reform.  For years I’ve been complaining that we tax equity financed investments at much higher rates than debt financed investments.  Not only does that make no sense on either equity or efficiency grounds, it also makes our financial system more unstable.  One reason the 2008 financial crisis was worse than 2001 is that the tech bubble was more about equity and the housing bubble was more about debt.  (Of course NGDP was the main reason it was worse.)

Bush proposes to cut corporate tax rates to 20%, switch to the territorial system used in other countries, allow the expensing of capital investments, and make up (at least some of) the revenue by no longer allowing the expensing of interest costs.  Finally, debt and equity would be on a level playing field.  And there’s lots of other great stuff—eliminate the marriage penalty, no more AMT, no death tax, etc., etc.  But rather than a top rate of 28%, I’d rather see 70%, combined with unlimited 401k privileges.  Still, a great proposal.

And now to go from the sublime to the ridiculous.  Hillary Clinton is proposing a capital gains reform that is so foolish that even the very liberal Massachusetts legislature eventually abandoned the idea.  There would be a sliding scale of capital gains tax rates. Here’s Alan Reynolds:

Hillary Clinton’s most memorable economic proposal, debuted this summer, is her plan to impose a punishing 43.4% top tax rate on capital gains that are cashed in within a two-year holding period. The rate would drift down to 23.8%, but only for investors that sat on investments for six years.

This is known as a “tapered” capital-gains tax, and it isn’t new. Mrs. Clinton is borrowing a page from Franklin D. Roosevelt, who trotted out this policy during the severe 1937-38 economic downturn, dubbed the Roosevelt Recession. She’d be wise to consider how it played out.

It’s scary that Clinton’s advisers are so brain dead on economics that they think there is some public policy purpose that would justify this nonsense.

We had this for a few years in Massachusetts (back in the 1990s, I seem to recall) and it was a nightmare.  You’d get all these complex statements from mutual fund companies about how many cap gains were under one year, or 1 to 2 years, or 2 to 3 years, or 3 to 4 years, or 4 to 5 years, or 5 to 6 years, or more than 6 years. Then for each one you had to laboriously put the amount into the correct category on the form.  If you owned 10 funds, you dealt with 70 calculations.  Eventually Massachusetts gave up on the silly idea.  And now Hillary Clinton wants to revive it? Why?

PS.  Don’t assume from this post that I lean toward the GOP.  On the most important issues facing the country I probably lean slightly toward the Dems, although my actual views are nothing like either party.

PPS.  Couldn’t savvy (and wealthy) investors just use derivatives to lock in gains, without selling?  Will this be like the estate tax, where only the suckers end up paying?

PPPS.  Dilip just informed me that Larry Summers is now blogging.  Instant reaction:  Larry Summers is a very, very, very talented blogger.

PPPPS.  I have a new post on the sticky wage model over at Econlog.

Tyler Cowen has a new post citing some scary data from China, on declining exports.  In this highly recommended video, China expert Julian Evans-Pritchard isn’t at all frightened by the data.  Evans-Pritchard (who obviously knows 10 times more about China than I’ll ever know), seems a bit more optimistic about China’s near term growth than I am.  I am on record predicting that China will slow from the 7% growth in the first half, to 6% over the next year or so.  Evans-Pritchard points out that if you focus on levels, Chinese trade data hit bottom in the first half, and output will probably start recovering from this point forward (although he indicates that August industrial production will be very weak for technical reasons.) The problem is that export growth was extremely strong in the second half of last year. Thus the year-over-year data look bad, but things have actually been improving since early 2015.

Further evidence of Chinese resiliency comes from the oil market:

In China, crude oil imports fell 13.4% in August to 26.59 million tonnes (6.29 million bpd) from the previous month. But they rose 5.6% from a year earlier.

“People are looking beyond the sharp (monthly) drop in Chinese import data and looking at the stronger details contained within it,” Commerzbank senior oil analyst Carsten Fritsch said.

In the first eight months of 2015, China’s crude imports were up 9.8% year-on-year at 6.63 million bpd, on still-solid demand for gasoline and kerosene as a growing middle class drives and flies more.

I’m no China expert, but I’d recommend focusing on things like the consensus forecast of Chinese growth (still well above 6%), as well as the research of people who look beyond the headline data points.

Tyler asks this question about the recent spate of weak data:

Under what required assumptions would this translate into a growth rate of say four percent?  Backward-looking?  Forward-looking?  Or is this just a slow structural shift as the Chinese economy gradually moves into services?  Inquiring minds wish to know.

Evans-Pritchard thinks services and light industry are still doing well, even as construction and heavy industry slow.  This makes sense to me, as even with the recent shift away from investment, China is still investing an awfully large amount. Say what you will about the waste (and I partly agree with you) there’s still enough useful investment being done to lead to a larger and larger flow of consumption each year.  More driving, more flying, more hotel visits, more subway rides, more high speed rail rides, etc., etc.  China’s a slowing juggernaut, but it’s still a juggernaut.

PS.  And while it’s of course dangerous to make too much of short term moves in equity markets, it does seem that global markets moved up today on the Chinese economic news, despite the negative headline figure.  And Japan is opening far higher tonight, again attributed to China.  Of course we shouldn’t draw sweeping conclusions about Chinese growth from this, just that data points aren’t always what they seem.

PPS. Any relation to Ambrose?

Rajat left an interesting comment on my recent Australia post, with some quotes by top Australian policymakers:

Australia has a central bank (the RBA) that is reluctant to cut the cash rate further to avoid ‘financial instability’ due to (as Marcus says) asset price ‘bubbles’ ‘popping’. RBA Governor, Glenn Stevens, has called Sydney house prices ‘crazy’:http://www.sbs.com.au/news/article/2015/06/10/sydney-house-price-boom-crazy The media release accompanying every monthly RBA policy decision refers to property prices, particularly Sydney’s:http://www.rba.gov.au/media-releases/2015/mr-15-15.html

To me, it seems the RBA wants a certain type of ‘handover’from mining investment to other forms of growth. It seems comfortable with some increase in private consumption, but not too much. Stevens recently said:

“But the bigger point is that monetary policy alone can’t deliver everything we need and expecting too much from it can lead, in time, to much bigger problems. Much of the effect of monetary policy comes through the spending, borrowing and saving decisions of households. There isn’t much cause from research, or from current data, to expect a direct impact on business investment. But of all the three broad sectors – households, government and corporations – it is households that probably have the least scope to expand their balance sheets to drive spending. That’s because they already did that a decade or more ago. Their debt burden, while being well serviced and with low arrears rates, is already high. It is for this reason that I have previously noted some reservations about how much monetary policy can be expected to do to boost growth with lower and lower interest rates. It is not that monetary policy is entirely powerless, but its marginal effect may be smaller, and the associated risks greater, the lower interest rates go from already very low levels. I think everyone can see that.”
http://www.rba.gov.au/speeches/2015/sp-gov-2015-06-10.html

Stevens’ RBA deputy, Phil Lowe, recently said:

“I suspect that it is unlikely to be in our national interest for this more prudent approach to give way to household consumption once again growing consistently much faster than our incomes. This is something we continue to be cognisant of in the setting of monetary policy. Some decline in the rate of household saving is probably appropriate as the economy rebalances after the terms of trade and mining investment booms. But, given the position of household balance sheets, it is unlikely to be in our long-term interest for a consumption boom to be financed by a pick-up in household borrowing.”
http://www.rba.gov.au/speeches/2015/sp-dg-2015-08-12.html

However, it’s clear the RBA would love to see an increase in non-mining investment. RBA speeches frequently exhort businesses to invest in a similar manner as you once criticised Mark Carney for saying to Canadian businesses. For example, see this speech from Stevens last August:

“But the thing that is most needed now is something monetary policy can’t directly cause: more of the sort of ‘animal spirits’ needed to support an expansion of the stock of existing assets (outside the mining sector), not just a re-pricing of existing assets. There are some encouraging signs here. Nonetheless, if reports are to be believed, many businesses remain intent on sustaining a flow of dividends and returning capital to shareholders, and less focused on implementing plans for growth. Any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand.”
http://www.rba.gov.au/speeches/2014/sp-gov-200814.html

The RBA would also like to see an increase in exports. The Governor’s monthly statements invariably refer to the level of the dollar and until very recently (with the AUD now down to US 70 cents from $US1.05 in 2011-13), included statements that “further depreciation seems both likely and necessary”: http://www.rba.gov.au/media-releases/2015/mr-15-11.html

Finally, while statements in support of supply-side economic reform are always welcome, to me it seems this recent speech by Stevens is a bit cheeky:

“Growth is important. And for a while now, there has not been quite enough growth. There has been growth, and more than in many countries. But, recent labour market outcomes notwithstanding, not as much as we ought to be capable of. “

Followed by:

“Reasonable people get this. They also know, intuitively, that the kind of growth we want won’t be delivered just by central bank adjustments to interest rates or short-term fiscal initiatives that bring forward demand from next year, only to have to give it back then. They are looking for more sustainable sources of growth. They want to see more genuine dynamism in the economy and to feel more confidence about their own future income.”

http://www.rba.gov.au/speeches/2015/sp-gov-2015-08-26.html

There’s a lot there, so let me give an overview of how I see these issues.

It’s fashionable to make wise sounding pronouncements about how monetary policy is not a panacea, and how we need a “balanced” approach, how we need to watch out for debt bubbles, and how fiscal must do its part, and how we need supply-side reforms, etc.

Unfortunately three issues get all mixed up here:

1.  The need to produce a stable path for NGDP (or perhaps nominal total compensation in the case of Australia.)

2.  The need for supply-side reforms to boost RGDP growth

3.  The need for financial market reforms to avoid excessive indebtedness.

Let’s clear up some misconceptions.  Monetary policy is a panacea for stable NGDP growth.  And you need stable NGDP growth (or nominal total comp.) regardless of what else is happening in the economy.  Monetary policy does not boost the economy by encouraging lending, it boosts the economy by encouraging more NGDP.  Higher lending is a side effect.

If there is excessive lending (due to moral hazard, tax breaks on debt, etc.) you still do whatever it takes to keep NGDP on target, but you also have tighter regulation of lending, so that more of the NGDP growth is non-credit oriented growth (like restaurant meals) and less is credit oriented growth (like housing.)

Monetary policy is not a panacea for a lack of RGDP growth.  Indeed the central bank should ignore RGDP.  Instead, policymakers should try to boost RGDP with supply-side reforms.

Australia’s not even at the zero bound, there’s utterly no reason not to do austerity right now.

One other point about Australia.  Watch the unemployment rate.  RGDP in Australia is distorted by mineral exports, which are not very labor intensive.  The RBA needs to keep the labor market close to equilibrium, by slow and steady growth in total labor compensation.  If RGDP and even NGDP falls and yet unemployment is stable, you have a pseudo-recession, not anything for the central bank to worry about.

HT:  Matt McOsker

In the 1600s, Salem put people in trial for being witches.  Today we are much more enlightened; Salem puts people on trial for not being honest-to-God, actual witches.  Or something like that.  In the comment section of my previous post Niklas Blanchard (I wish he was still blogging) reminded me that my impoverished imagination is incapable of dreaming up any absurd analogy that is too far-fetched to be true:

Starting this week, fortune tellers in Warren, Mich., must be fingerprinted and pay an annual fee of $150 “” plus $10 for a police background check “” to practice their craft. The new rules are among America’s strictest on palmists, fortune readers and other psychics, part of a growing push to regulate a business that has never been taken, or overseen, very seriously. But officials in Warren, a town of 138,000 near Detroit, say it’s time to weed out tricksters. “We had no mechanism of enforcement to protect people against unsavory characters,” Warren city-council member Keith Sadowski says. “We want to be sure there is some recourse in case we do get somebody who is not legitimate.” . . .

Three years ago, Salem, Mass., famous for its 17th century witch trials “” and something of a magnet for spiritual artisans “” tightened its rules on background checks for psychics while easing its cap on the number of local fortune tellers allowed in town. . . .

Not all psychics fear tougher government oversight. “I think it’s wonderful,” Julia Mary Cox, a Michigan psychic plying her craft near Warren, says of the town’s new rules. “There are so many people practicing out there, doing it under false pretenses, giving honest people a bad name.” But she concedes she wishes Warren’s new rules could more clearly separate true fortune tellers from false seers. “They are not looking at any training,” she notes. “I have a college degree, I have a background in religion and philosophy and English, and I have experience doing this.”

So I’d like to amend my previous post.  Any insinuation that the government is inconsistent in applying its “principles” is hereby retracted.  The SEC is just following a long and venerable tradition in American regulation.

PS.  Add one more to my American freak show post.

PPS.  Mark, is Keith any relation?

I have a new post at Econlog that is far more important that this throwaway effort.  I also recommend a recent post on China by David Beckworth, which I initially overlooked.  And excellent posts on the Fed by Tim Duy and Evan Soltas. But if you insist on continuing . . .

Scott Alexander is perturbed that 80% to 90% of doctors don’t know how to answer an extremely simple statistics question like this:

Ten out of every 1,000 women have breast cancer. Of these 10 women with breast cancer, 9 test positive. Of the 990 women without cancer, about 89 nevertheless test positive. A woman tests positive and wants to know whether she has breast cancer for sure, or at least what the chances are. What is the best answer?

(OK, technically 26% got it right, but it was multiple choice with 5 choices—you do the math.)  Nobody who’s taught in college should be surprised by this.  Unless you test students on material that they are told they’ll be tested on, and that they studied for the night before, most students basically can’t answer anything, even 8th grade level questions. Heck, I’d probably get some elementary stat questions wrong (although at least I can do the “story problems” like the one above) Alexander is concerned about the implications of this (here’s he’s referring to another question):

Good news! 42% of doctors can correctly answer a true-false question on p-values! That’s only 8% worse than a coin flip!

And this paragraph is your friendly reminder that six months after this study was published, the FDA decided it was unsafe for individuals to look at their own genome since they might misunderstand the risks involved. Instead, they must rely on their doctor. I am sure that statisticians and math professors making life-changing health or reproductive decisions feel perfectly confident being at the mercy of people whose statistics knowledge is worse than chance.

Obviously I agree.  But the FDA is model of rationality compared to the SEC.  At least with the FDA you can sort of understand the logic of the regulation.  If doctors actually knew what they theoretically should know, what they were taught in college, then they would have more expertise than the average person.  But not even that excuse is true for the regulation of stock pickers:

The Investment Advisers Act of 1940 is a United States federal law that was created to regulate the actions of those giving investment advice for compensation as means to protect the public.

The Act defines an “investment adviser” as anyone who, for compensation engages in the business of advising others about the value of securities or the advisability of investing in, purchasing, or selling securities.

So you go to your investment adviser for stock picking advice, not to some idiot like me. And that’s because your investment advisor is better able to pick the right stocks and mutual funds than I can.  Or at least that’s the theory.  In fact, they do worse than I’d do, in all but a few cases.  The rest of the post will exclude the tiny number of investment advisors that simply tell you to put everything into low cost index funds.

For the rest, the vast majority of regulated investment advisers, they either understand than indexed funds outperform managed accounts, and hence are dishonest, or they don’t understand and are incompetent.  So the SEC regulation virtually forces people like my mother to go to investment advisers who are either knaves or fools.

(On the other hand if doctors profit from needless cancer tests, then maybe medicine isn’t so different from the investment industry.  Maybe the doctors are just pretending not to understand statistics, as a cover.)

Progressives like to talk about the “science” of an issue (at least sometimes, not the science of gender differences, or GMO foods, or taxing capital income, or free trade, or that studies show that voucher schools are cheaper, but at least for global warming.) OK, the science of finance says that indexed funds outperform managed funds.  That stock pickers are no more helpful to investors than soothsayers. So if we force stock pickers to be regulated, why not do the same for palm readers, fortune tellers, soothsayers, tea leaf readers, and all the rest?  Alternatively, is the SEC going after unlicensed stock pickers any different from the leaders of Salem going after witches?  Aren’t both types of prosecution equally “anti-science”?