Archive for January, 2009
A week or two ago, Greg Mankiw and Nate Silver had a bit of a back-and-forth on stimulus vs tax cuts. In order:
Ignoring the attitude readily apparent on both sides, I was struck by how much this tiresome debate over taxes vs direct stimulus actually misses. Indeed, many of the other macroeconomic factors seems equally important, and without solving these other problems, the current debate — while fun and exciting — is ultimately pointless.
Tyler Cowen's 8 reasons we are in a recession:
- We have zombie banks.
- There is considerable regulatory uncertainty in banking and finance.
- There is a negative wealth effect from lower home and asset prices.
- There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption.
- Some of the automakers are finally meeting their end, or would meet their end without government aid.
- Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone.
- International factors are strongly negative.
- There is a decline in aggregate demand, resulting from some mix of 1-7.
I don't think any serious person would argue with this list.
As I see it, the problem with stimulus seems to be that it doesn't address anything but decreased aggregate demand. A real problem, sure, but not the only problem.
To my way of thinking, tax cuts will do a couple of things:
- Offset some of the negative wealth effects associated with depressed home and asset prices.
- Offset some of the longer-term effects of our debt-financed consumption of the last 8 years. I see a tax cut as being better for individual credit card companies and loan companies than it is for the economy as a whole. If the money returned to the taxpayer is used to pay down debt, it does nothing for the macroeconomy in the short run.
Stimulating demand directly through government purchasing/construction/etc sidesteps these two problems. But it also does nothing to help with anything except problem #8, especially if you're looking at a multiplier of ~1.
All in all, which one is "better" is a pointless argument because a sound plan would have both. (And indeed the recovery act has both.)
So where are the policy debates over zombie banks? There's debate over better regulation, but it's not especially informed debate; it's more like "Omg we need more regulation!" where regulation is left undefined for all intents and purposes as far as I can see.
Why aren't we talking about negative wealth effects? We can impact them somewhat directly via tax credits, but nobody is talking about tax credits for this specific reason. Maybe because explaining what a negative wealth effect is to a layperson is difficult to do? I don't know. It's not sexy? That seems a more likely explanation. It's not terribly partisan? That seems even more likely.
The auto industry is obviously being hotly debated, and conservatives seem to think that a chapter 11 restructuring is the best way to go. I don't necessarily disagree with that, but going through chapter 11 requires financing… otherwise it turns into a chapter 7 liquidation, which is clearly undesirable. How about making the auto bailouts contingent upon using that taxpayer money to restructure, in effect making the taxpayers the DIP financiers? I haven't heard that mentioned as a possibility, but I hardly think I'm the only person on the planet who hasn't wondered if this could be done.
How can we restore consumer confidence? The new administration taking office will help with that somewhat, but I don't see any ready-made solutions in the economists' handbook except for (maybe) time and getting the other 7 factors under control.
In the final analysis, I want to know why we are beating the stimulus vs tax cuts drum exclusively when there are so many other factors in play. Krugman's hammering of the Keynesian, great depression angle seems incredibly narrow because this recession strikes me as being somewhat different, and supply-siders like Mankiw hammering the tax credit/cut/rebate angle miss so many other factors that need to be talked about. (Though to be fair, Mankiw doesn't talk exclusively about the tax angle the way Krugman seems to with his Stimulus Now! rhetoric.)
Am I totally off-base in thinking that both sides are being somewhat partisan, here, which is ultimately bad for meaningful discussion?
I had printed out a bunch of entries by Andy Harless, and they've been sitting in my To Read pile for a couple of weeks. I know they're dense, so I had been putting them off.
- In Case of Emergency Break Glass, a brilliantly-titled piece on Frédéric Bastiat's well-known Parable of the broken window. He explains why the fallacy doesn't hold true today with modern consumers' consumption and saving habits. Essentially if we break a window today, our present consumption isn't lessened. Instead, we save a bit less, and because we don't know when we will die, our future consumption likely isn't impacted much if at all, either. This results in a net gain to the macroeconomy.
While Andy is correct about consumer behavior, I do find myself wondering if M. Bastiat was also correct — in his own time. In poorer times, might a broken window have actually led to lower present and future consumption? I suspect so, especially without ready access to easy consumer credit.
- To Monetize or Not to Monetize: Who Cares?, a look at the interplay between the Fed and the Treasury with respect to expected consumer behavior and the fungibility of T-bills vs money. I must confess that I don't understand most of it, yet.
- Dynamic Scoring, a shorter entry on real costs of stimulus relative in terms of tax revenue and GDP. This particular sentence caught my attention and simultaneously boggled my mind:
So if a tax cut or an expenditure increase were expected to create, say, a million extra jobs, then, under normal economic conditions, the Fed would simply raise interest rates enough (according to its best estimate) to destroy a million jobs. (If the Fed didn't think the demand for those million jobs would be potentially inflationary, then it would already have tried to create them.)
Emphasis his. The idea of the Fed doing something to destroy jobs seems non-sensical at first, even though I know it makes perfect sense.
Even though I am an econ major in my last semester, I don't have any formal macroeconomics under my belt, nor do I have any finance/monetary policy anywhere, either. I'm getting all of that in the next three months. Despite this, I do have a pretty good grasp of macro theory in general, though I do feel the distinct lack of framework on which to hang this kind of material when I read it. Thankfully that will be remedied quickly.
(You'll notice that it doesn't stop me from jumping into the deep end, because that's just the way I roll…)
One of the more disturbing things I've seen in quite a while:
Later from Rachel Maddow:
Some more backstory.
On Executive compensation:
SPECIFIC REQUIREMENTS- The standards established under paragraph (1) shall include–
(A) limits on compensation that exclude incentives for senior executive officers of an assisted institution which received assistance under this title to take unnecessary and excessive risks that threaten the value of such institution during the period that any assistance under this title is outstanding;
(B) a provision for the recovery by such institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later found to be materially inaccurate;
(C) a prohibition on such institution making any golden parachute payment to a senior executive officer during the period that the assistance under this title is outstanding;
(D) a prohibition on such institution paying or accruing any bonus or incentive compensation, during the period that the assistance under this title is outstanding, to the 25 most highly-compensated employees; and
(E) a prohibition on any compensation plan that would encourage manipulation of such institution's reported earnings to enhance the compensation of any of its employees.
Good, good. There's lots more in that bill if you're interested. Moving on…
- H.R. 391: To amend the Clean Air Act to provide that greenhouse gases are not subject to the Act, and for other purposes.
Greenhouse gases aren't toxic to people per se, the way the other pollutants covered in the Act are. As much as it pains me to say it, this restriction probably makes sense. Greenhouse gases should be addressed in their own bodies of legislation instead of being shoehorned into a bill that was never meant to account for greenhouse-type externalities.
- H.R. 374: To require the closure of the detention facility at Guatanamo Bay, Cuba, to limit the use of certain interrogation techniques, to prohibit interrogation by contractors, to require notification of the International Committee of the Red Cross of detainees, and for other purposes.
- H.R. 426: To amend the Internal Revenue Code of 1986 to reduce the depreciation recovery period for certain roof systems.
Fulltext not available, but if it's what I suspect it is — an amendment to the IRC that allows for a quicker accounting depreciation schedule for roofing systems — it's a win for whatever businesses have these systems. The quicker you can write off a capital expense, the better it is for your bottom line.
- H.R. 448: To protect seniors in the United States from elder abuse by establishing specialized elder abuse prosecution and research programs and activities to aid victims of elder abuse, to provide training to prosecutors and other law enforcement related to elder abuse prevention and protection, to establish programs that provide for emergency crisis response teams to combat elder abuse, and for other purposes.
My family owns a homecare agency for seniors and disabled, and elder abuse — usually through neglect — is quite common. I'll be interested to read the fulltext when it's available.
H.R. 429: To permit the televising of Supreme Court proceedings
Change we hope to believe in… continuing the opening up and focus on transparency of government procedure. Sponsored by a Republican, no less.
- H.R. 423: To provide compensation for certain World War II veterans who survived the Bataan Death March and were held as prisoners of war by the Japanese.
The Bataan Death March took place in 1942… 67 years ago. Most of these folks are probably already dead. Why now? I'm not against it; it just seems a little late.
- H.R. 364: To restrict nuclear cooperation with the United Arab Emirates, and for other purposes
The fulltext of this bill is not available, unfortunately. It's a bipartisan bill, which surprised me; I would have pegged it as a Republican machination. In general, I am in favor of nuclear power, and while I realize that there's not a single country on Earth that has nuclear power without some nuclear weapons capability, nuclear power is ultimately a clean, environmentally-friendly means of generating electricity. I don't see the UAE as a particularly dangerous entity. They're fairly progressive as Muslim nations go, and they're interested in moving away from a petroleum-based economy, which is a good thing.
- H. J. Res. 17: Expressing support for designation of the month of October 2009 as "Country Music Month" and to honor country music for its long history of supporting America's armed forces and its tremendous impact on national patriotism.
Introduced by Ted Poe (R-TX). I'm not sure how this particular bill could possibly reinforce certain stereotypes more than it already does. It's like a pre-packaged joke just begging to be used in a bad sitcom. And I resent the insinuation that music is patriotic because it may include jingoistic overtones and the glorification of "small town" values.