Archive for the Category Supply-side economics


Just how low can the GOP go?

Just when you think the GOP cannot get any lower, we read this:

The 401(k) simply defers taxes, it doesn’t exempt them. According to the Tax Foundation, a nonpartisan think tank, this half-trillion figure “does not represent taxes that will never be paid. Instead, it represents taxes that will be paid at a future time, when individuals retire.”

“The revenue will have to be found in the future,” Olivia Mitchell, a professor at the Wharton School and executive director of the Pension Research Council, told Yahoo Finance. “It’s robbing Peter to pay Paul.” . . .

 “It’s essentially an accounting gimmick,” said Mitchell .  .  . Marc Goldwein also called it a “budgetary gimmick.”

“Roths are a worse deal for the federal government — probably more revenue is lost,” he told Yahoo Finance. “So if anything, switching from traditional tax-deferred plans to Roth IRAs is probably a long-term loss.”

So the GOP wants to move hundreds of billions in future tax revenue (which will be sorely needed due to the retirement of boomers) up to the present, to provide a fig leaf for their incredibly irresponsible plans to balloon the national debt.  Wonderful.

They claim they’ll replace 401ks with Roths, but:

A shift to Roths from traditional vehicles may present a further fiscal problem in the future. Mitchell believes that taxes will have to rise in the future, potentially erasing Roths’s tax-free withdrawal.

“With population aging and longer lifetimes we’re not going to be able to keep the promise to have Roths not be taxed in retirement,” she said. “I think it’s going to get more difficult to protect.”

Wait, you mean future governments might not honor their promises?  Um, yes:

Politicians from both parties have tried to scale back the 401(k) system. Former President Barack Obama proposed a cap on 401(k) balances of $3.4  million in 2015.

Over at Econlog, I praised Trump for taking a firm stand against any cuts in 401ks.  It took only two days for that to be exposed as another one of Trump’s unending series of lies:

After Trump tweeted that “There will be NO change to your 401(k)” on Oct. 23, Trump then told reporters two days later, “Well, maybe it is [on the table], and maybe we’ll use it as negotiating.”

Speaking of lies, the White House informs us that all 16 of the women who accused Trump of sexual harassment are lying.  Every last one of them. That’s a relief.  For a moment there I was worried that we had a Harvey Weinstein in the White House.

PS.  Suppose the Financial Times said, “Ohio State’s come from behind victory over Penn State shows the need for higher interest rates.”  How would you react? Scratch your head a bit?   Then how do you react to this FT headline:

Billionaire boom is a sign that rates need to rise

Nowhere in the article does the author tell us whether these higher rates are to be generated with an easy money policy (as in the 1960s) or a tight money policy.  What scares me the most is that I suspect they don’t even understand the question.

Can we have at least one media outlet that is not clueless about monetary policy?  (I suppose the National Review is best.)  For the Nth time, interest rates are not a policy; they are the effect of various alternative policies.

HT:  Stephen Kirchner

A few thoughts on policy

I won’t have much time to post here until the end of the year, as I am on the stretch drive of two book projects.  But I thought I should go on record on a couple of policy issues in the news:

1.  There are rumors that Trump might pick Kevin Warsh to head the Fed.  I’d prefer he keep Yellen. She’s presided over more stable NGDP growth than any other Fed chair (although admittedly the sample size is small).  And there are two arguments against Warsh.  He’s far less knowledgeable about monetary economics than Yellen, and he was completely wrong about policy during the Great Recession.  Having said that, picking Warsh wouldn’t result in much change in policy, because Fed chairs don’t actually have all that much influence.  I doubt whether fed funds futures would show much change.

2.  Presidents also don’t have much impact on the economy, especially when they are as incompetent and ineffectual as Trump.  (This is basically year nine of the Obama administration.)  The one issue to watch is taxes.  If the GOP simply cuts rates and increases the budget deficit then it will have failed in at least as big a way as in health care.  The sine qua non of a successful tax reform is some combination of closing loopholes and simplifying the tax system.  (For health care it’s cutting costs.)  There is recent chatter that the GOP may back off from plans to close loopholes like the deductibility of interest (in corporate taxes) or the deductibility of state and local taxes (in the personal income tax code.)  That would be a huge mistake.  If all they do is cut rates then the Dems will simply reverse the cuts.  The Dems seem to have zero interest in reforming the tax code, so if the GOP fails in its once in 30 year attempt, and gives us something like Bush did in 2001, then they will have failed.

I’d add that a big tax cut that balloons the budget deficit would also increase the trade deficit. This FT article points out that Trump’s policies have already boosted the trade deficit (up by 9% so far this year) but his fiscal plans would make it far “worse”.  Fortunately, trade deficits are not bad for the economy.  Unfortunately, a budget deficit is.  (Economic nationalists like Bannon should be horrified by Trump’s tax plans, but they are generally too ignorant of macro to understand the implications of what he’s proposing.)

If politics makes it too hard to close tax loopholes then an interesting backdoor approach is to sharply raise the standard deduction.  Trump proposes doubling it to $24,000 for a married couple, which would reduce the number of itemizers from 45 million to 7 million.  In other words, this would mean that tax loopholes would no longer benefit the broad middle class.  Once they are linked only to the rich it would make them easier to go after in future reforms.  A clever idea, let’s see if he carries through. (I suspect he won’t.)

PS.  Limiting a loophole AMT-style doesn’t count as a partial victory, as it makes the tax code even more complex.

Wait, which tax are they repealing?

You really need a sense of humor to read the news these days.  Here’s Matt Yglesias, describing the Senate Majority leader:

Many more moderate House members, meanwhile, told themselves the real bill would be written by the Senate, which no doubt would be less harsh on Medicaid. Instead, McConnell opted to be harsher and has not softened it even slightly, even though he has hundreds of billions of dollars of flexibility.

Bizarrely, instead of addressing the issue, “McConnell has told several hesitant senators (including Portman and Sen. Shelley Moore Capito (R-W.Va.): The bill’s deepest Medicaid cuts are far into the future, and they’ll never go into effect anyway.”

McConnell made deep Medicaid cuts to please the GOP conservatives, knowing that none of this will ever go into effect.  Yglesias has a nice graph showing the recent changes:

So they had to rescind one of the tax increases, and they chose the tax on medical devices over the tax on saving and investment?  They chose to cut taxes on a massively subsidized industry instead of paring back taxes on savers who are already double taxed on the same income?  Is this the modern GOP, or the AMA?

I recall that back during the campaign some Republicans convinced themselves that Trump was a supply-sider, pointing to his “support” of a 25% top tax rate, ending the extra Obamacare taxes on capital, ending the AMT, ending the estate taxes, etc., etc.  A supply-side miracle bringing us 4% RGDP growth and tens of millions of jobs.

I can hardly wait!

PS.  If it’s monetary policy you want, it’s over at Econlog.

PPS.  So the Federal government will launch a $45 billion war on opioids.  What could go wrong?

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

Dodd/Frank, NIMBY and Trump—How America forgot how to build houses.

The housing market is strong:

Existing home sales jumped 3.3 percent to a seasonally adjusted annual rate of 5.69 million units last month, the highest level since February 2007, the NAR said.

Economists had forecast sales rising only 1.1 percent to a pace of 5.54 million units in January. Home resales were up 3.8 percent from January 2016.

Though the nation’s housing inventory increased from December, it remained near a record low. As a result, the median house price vaulted 7.1 percent from a year ago to $228,900 in January. That was the biggest increase since January 2016.

But housing construction is at relatively low levels.  It looks like the supply side is being hit by a triple whammy of adverse supply shocks:

Economists say homebuilders are struggling to plug the inventory gap because of difficulties securing funding as well as shortages of land and labor. The NAR estimates housing starts and completions should be in a range of 1.5 million to 1.6 million units to alleviate the chronic shortage.

Housing starts are running above a rate of 1.2 million units and completions around a pace of 1 million units.

Funding and land are no mystery (Dodd/Frank, NIMBY), but what about labor?

The tight supply in home construction results from a shortage in able construction workers. And, given President Donald Trump’s aggressive ambitions to crack down on undocumented immigrants, homebuilders may have an even tougher time finding workers in the future, according to Yun.

“It’s widely known but less discussed that there are many undocumented workers at construction sites. And with the border being much tighter, it may lead to a greater construction worker shortage unless America can crank out people with the skills in construction, plumbing, lumber framing, and welding,” he said.

The US has approximately 200,000 unfilled construction jobs, which represents an 81% increase over the last two years, according to estimates from the National Association of Homebuilders.

Homebuilders like Lennar (LEN) and Toll Brothers (TOL) have cited a shortage in construction workers as a major reason they’ve had to slow down home construction.

Whether through vocational schools or intensive training programs, the US needs to produce more workers who can start building homes. “Homebuilders keep delaying as to when they can dig the ground,” Yun said. “They’re actively looking for workers, but there just aren’t enough.”

Whenever I post on this issue, commenters tell me it’s “fake news”.  That’s because it doesn’t fit the fashionable narrative that there are no more jobs for blue-collar workers.  If so, it’s an 81% bigger fake problem than 2 years ago.

Of course an immigration crackdown could also hit housing demand:

“If Trump gets the immigration plan he wants, the housing market will get hit harder than any other,” said Alex Nowrasteh, a policy analyst for the libertarian Cato Institute. If “millions of people get deported and more people don’t come in to take their place, then you’ll have downward pressure on home prices, especially in urban areas.”

The immigrant housing market is often underappreciated, in part, because undocumented workers and the companies that cater to them sometimes like to fly below the radar.

Some smaller firms will make loans to the undocumented, with higher interest rates.

If you use Case-Shiller, then real home prices are back up to 2004 levels.  Of course construction was at a very high level in 2004 (nearly 2 million).  The fact that construction is at a low level today, with the same real housing prices, indicates a massive adverse supply shock has hit the home construction industry.  The buyers are there, the prices are good, the inventories are low—it’s just that America “forgot” how to build lots of single family homes.

America’s housing market increasingly reminds me of that old TV commercial:  “Help me, I’ve fallen and I can’t get up.”

PS.  Noah Smith has an excellent post on immigration.  A voice of reason.

PPS.  This is the best article I’ve ever read on Trump supporters.  One theme that comes up over and over again is that it’s counterproductive to ridicule Trump voters.