Tag Archives: macroeconomics

What the stimulus vs tax cuts debate misses

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:

  1. Mankiw’s NYTimes article
  2. Silver’s response
  3. Mankiw’s “teachable moment” reply
  4. Silver’s retort

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:

  1. We have zombie banks.
  2. There is considerable regulatory uncertainty in banking and finance.
  3. There is a negative wealth effect from lower home and asset prices.
  4. There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption.
  5. Some of the automakers are finally meeting their end, or would meet their end without government aid.
  6. Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone.
  7. International factors are strongly negative.
  8. 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:

  1. Offset some of the negative wealth effects associated with depressed home and asset prices.
  2. 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?

A little light reading…

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.

  1. 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.
  2. 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.
  3. 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…)

An economic case for being “green”

If I were a venture capitalist today, I wouldn’t be looking at Internet startups. While the Internet is a sexy market and commands a lot of mindshare, I don’t think that it’s the future. We’re coming to the end of the Information Age. No, the problems uncovered by the Information Age aren’t solved. Search isn’t solved. Scientific computing as a whole is still quite nascent.

But we are gradually working our way out of this Age and into the next: the Renewables Age. Just like we’re still using what was developed during the Industrial Revolution, so too will we continue to use and develop the goods and services developed during this Information Age. So while computing and information management isn’t going anywhere, it will be superseded by bigger economic concerns. Namely, renewable energy.

I firmly believe that a few well-placed, relatively modest investments today can very probably yield absurd returns on investment sometime down the road. It would, however, be a very long-run type of play, and many VCs aren’t prepared to make an investment that won’t pay off within ten years.

With that in mind, I wrote the following as part of a larger essay for an economic history class about a week ago. What is interesting is that when I started the paper, I had no idea where I would end up. Like most Americans, I hadn’t thought about the “greening” of the economy at all. I didn’t have a conclusion in mind when I began. The final result was this, and I think I make a pretty good case for renewables and investment therein. At the very least, I have convinced myself, and I don’t really know how you can argue against it unless you’re talking timespans of less than ten years.

I’ve broken it up into a couple of shorter pieces because it’s simply too long to post as-is. No one would read it. Because it’s unedited, the beginning of each piece might feel a little jarring beginning on day 2.

  1. Part 1: The Little Things
  2. Part 2: Wind and waste heat
  3. Part 3: Petroleum, plastic, and data centers
  4. Part 4: How it will shake out and conclusion

PDF of the whole thing (2,158 words).

Let me know what you think…