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Tax Exempt Hospitals

cross posted from ataxingmatter Linda Beale

Tax Exempt Hospitals–the American Hospital Association response to the IRS study

Last week, I reported on the government study of tax exempt hospitals, which looked at community benefit and executive compensation, and asked whether hospitals merit tax exempt status, at this link. The conclusions on community benefit were not very impressive–a few hospitals do a bulk of the benefiting, but all of the hospitals take advantage of the tax exemption. And all of the executives are quite highly paid, a trend in tax exempts that is not a very nice one to see.

Not surprisingly, the American Hospital Association has responded to the IRS report with a press release that, as John Colombo over on Nonprofit Law Prof Blog notes, “defends nonprofit hospitals from any unsavory light cast by the report” while “not highlight[ing] the ridiculus practice of hospitals reporting the amount of uncompensated care and other community benefits by the difference between standard charges and costs” and a few other not so savory items.

The lead statement in the press release is the following:

Today’s IRS report reaffirms that hospitals of all types are providing a healthy mix of care and services to the communities they serve. While the report has its limitations, it highlights how hospitals across the country are meeting their mission of caring for communities.

My reaction upon reading that lead-in statement was, basically, “yeah, sure”. As Colombo noted, the report highlights how little hospitals really do in terms of community benefit, and notes (to an extent that I did not discuss in my earlier report) the ways in which many hospitals try to overreport community benefit by counting their foregoine expected profits (which could be outrageously inflated) rather than any real loss from providing services. They get their costs, they just don’t always make a profit off a transaction. More than that, the report makes one ask whether most tax-exempt hospitals have any right at all to claim an exemption–it begs for proof, that is, that hospitals are, indeed, “meeting their mission” rather than just making profits. Even if the executive compensation currently paid satisfies the IRS rather exec-friendly rules, it is actually outrageously high for nonprofits.

Somewhere, someday, this ability of corporations,–whether taxpayers or exempt–to rip off taxpayers and underpay their typical workers–the orderlies and nurses, the clerks in the back offices and the receptionists up front– in order to pay outlandishly large salaries to the people at the top of the iceberg who benefit from the corporatist approach or in order not to provide the kind of free care to the underinsured that is expected of “charity” hospitals, has to stop.

February 24, 2009

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Social Security and the Debt Clock (why I get headaches sometimes)

by Bruce Webb

The Treasury Department maintains a handy web application called Debt to the Penny. As the name suggests it will give you total Public Debt to the penny for specific dates in the past or for a range of dates. It is this total Public Debt figure that is generally cited in news coverage, resulting in reporting that debt under Bush went from $5,727,776,738,304.64 on Jan 19, 2001 to $10,626,877,048,913.08 on Jan 20, 2009. If theoretically Bush had continued Clinton era fiscal policies and had Clinton era outcomes would the the final Total Debt figure be higher that $5.7 trillion? Or lower? or About the same?

The obvious, intuitive answer would be ‘lower’. That is even small General Fund surpluses serve to lower overall debt and that effect combined with the higher rate of real wages experienced in Clinton’s terms means higher revenue and an even greater surplus in Social Security, so General Fund surplus plus Social Security surplus = lower debt. Right?

Hmm, well, no, not necessarily. To see why you can follow this below the fold. Just be sure to bring your headache medication of choice.

Because a closer look at Debt to the Penny shows that Treasury tracks two different debt categories: Debt held by the Public and Intragovernmental Holdings and combines them to get total Public Debt. And more than half of Intragovernmental Holdings are made up of the Special Treasuries in the Social Security Trust Funds. The Bush years did not put any serious holes in long-term possibilities for Social Security solvency, results approaching total system solvency being by my calculations more probable than not. That doesn’t mean the TF came through unscathed. Per the 2001 Report’s Intermediate Cost projections toward year end 2008 TF balance was projected to be $2.808 trillion up from $1.049 trillion. Table II.D1.- Abbreviated Operations of the Combined OASI and DI Trust Funds, Calendar Years 2000-10 [Amounts in billions] Instead it ended up at $2.4 trillion.

So if we return to our theoretical scenario we would have Clinton era small General Fund surpluses combined presumedly with Intermediate Cost SS surpluses. But our equation changes. Now we have General Fund surplus MINUS Social Security surplus = total debt. Whether the resultant is higher or lower than the original $5.7 trillion in total debt is difficult to calculate in precise terms but it seems likely that the growth in the TF by $1.75 trillion (2001 projection ) would have likely been significantly more than the cumulative GF surplus meaning that the Debt Clock would have continued to tick.

If we examine the Social Security Reports from 1997 to 2007 we see that the optimistic Low Cost alternative projects what would seem to be a Goldilocks outcome, with the porridge being neither too hot or too cold. After all what is it about fully funded benefits with no needed changes in taxation or retirement age is there not to like? Well nothing really. Until you start looking at issues of intergenerational equity. Because how does Low Cost translate to the Debt Clock in future years?

Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions]
2040 $11.7 trillion; 2060 $28.3 trillion; 2080 $88.0 trillion and all of that scoring as debt on the Debt Clock. That is why I get headaches, fully funded Social Security translating to ever mounting total Public Debt.

Which only compound when I consider the flipping point. Under Low Cost assumptions Social Security relies on interest earned on the TF to fill the gap between revenue from taxes and total cost for every year from 2023-2064. But the actual principal in the TF is entirely due to excess contributions made by workers from 1983-2023. In 2065 Low Cost projections would have tax revenues once again exceeding cost without needing to tap the interest on the principal which at that point would total $37.0 trillion. Who has the moral claim to that money? In 2065 there will be substantial numbers of retirees who were in the work force prior to 2023. But only that fraction of them who owe tax on benefits are still contributing anything and their whole cohort has secure benefits going forward, they can be made whole by eliminating tax on benefits. So what claim do those workers who entered the work force after 2023 but before 2065 really have? Sure their contributions served to largely fund the retirement of people before them, but only ‘largely’ because a substantial part of that cost was picked up by interest on surplus payroll contributions they never had to pay, to some degree they have had a subsidized ride and have been made whole as is. And the worker entering the workforce in 2065 doesn’t have too much of a claim on the balance given that he has yet to pay anything at all and is projected to get full benefits.

The simplest answer is to first simply write down the TF in 2065 from $37 trillion to $7.5 trillion (one year of reserves) and then reduce FICA to the level where it plus interest on the remaining $7.5 trillion will continue to meet total cost. And then secondly commit to rebating to surviving retirees any lifetime tax on benefits paid. In this scenario nobody gets seriously screwed, they paid their insurance premium in the form of payroll tax, everyone gets full benefits. But viewed from another light it is just a $29.5 trillion dollar gift to those people who were on the hook previously, i.e. high income earners who just end up with a huge liability lifted. Meaning that the people who borrowed all that money from 1983 to 2023, or at least their heirs, get a windfall while still have being able to put their boots in the sides of Boomers and Gen-Xers (who themselves would have been fooled into blaming Boomers all along).

This is not a simple story, which is why it gives me headaches to explain. But it goes to show why Social Security surpluses are not an unalloyed good. Instead they can serve to create a mental picture of total debt that is disconnected with economic reality. If we end up achieving Low Cost outcomes, or outcomes close to that, and as a result at some point in the next fifty years we end up writing down the TF by $29 trillion, is that portion of the principal really debt that should be scored on the Debt Clock in the meantime? Certainly it was a liability to the degree that interest had to be paid on at least a portion of it (in the mid-thirties this approaches 50% of accrued interest needing to be tapped in any given year, that percentage drops over time). Well it is hard to say.

Moral? Don’t let the Pete G. Peterson people get a backdoors victory by trumpeting Total Debt while slyly denying that the Trust Fund is real. Because if it is not real to the degree that Peterson et al are never going to have to pay the borrowed money back, either because the economy grows fast enough to mean it is not needed in the end or because they will just get us to accept lower benefits, then it ends up being no more debt than ‘unfunded liability’ means an actual liability. They are calling ‘debt’ to scare you into actions that remove that debt. From their ledgers. Because Peterson would still have workers be screwed in the form of lower benefits.

(BTW these calculations show why Buffpilot’s claim that Clinton didn’t reduce debt is not quite right. First of all some of that ‘debt’ was really SS surpluses, and second he ignores inflation by using nominal and not real numbers.)

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Can We Stop Pretending Nationalisation is a Bad Idea? The WSJ has.

I’ve spent most of the past two weeks alternating between dizziness and sleep. Maybe the dizziness explains why I find myself in agreement with a WSJ editorial:

In a better world, Citi would have long ago been put into bankruptcy. The FDIC could have taken over and disposed of the bank’s assets, while protecting insured deposits as it always does. The profitable parts of Citigroup could then have been sold off to people who could better manage them.

Let’s do some elementary math in support of the WSJ position:

Taxpayers have already put more than $50 billion in capital into the bank, while guaranteeing $301 billion of its bad assets, and the bank still can’t stop its slide.

All right, I’ll work with the low number, which is the most optimistic estimate anyone has published recently: $50 Billion. The Big C’s market capitalisation (the Present Value of the Expected Unencumbered Future Cash Flows as expressed as the stock price times the number of shares) as of last night is $8.18 Billion.

Can we stop talking about the evils of “wiping out the existing shareholders”? They were wiped out more than $40 Billion ago.

The WSJ does make one mistake:

But in this vale of taxpayer tears, Citi is “too big to fail” and thus must be propped up lest it (allegedly) spread contagion through the financial system. While that may have been true last fall amid the worst of the financial panic, we don’t think the contagion would be the same now that the federal government has guaranteed anything in the financial system that moves.

Well, not exactly. By my count from the FDIC Failed Banks list, 28 banks have been closed since October of 2008, including two yesterday. And there’s no sign that that trend is ending. But this is spot on:

That isn’t the view at Treasury, which yesterday agreed to a stock swap that will buy Citi more time to, well, who knows? The feds will trade the preferred taxpayer shares for Citigroup common, which means giving up their 5% dividend and taking on more future risk in return for a 36% ownership stake.

Let’s review below the fold:

  1. The Fed has put at least $50 billion into The Big C.*
  2. The Big C is worth, according to its best-informed shareholders, slightly over $8 billion.**
  3. The Fed’s $50 billion will get it a 36% share in The Big C.
  4. Basic Math Interlude: $50B=0.36x => x = $50B/0.36 = $138.89B implied value
  5. Pause to repeat: The market thinks The Big C is worth just over $8 Billion. The current “book value” of the institution—a mythical number only an accountant could love, and her only because she is paid to love it—is just over $80 Billion. The Best Case Scenario for the Fed commitment is that The Big C is worth nearly $140 Billion.
  6. Interlude: [search Internet for a picture of The Nile to insert here. Settle for trying to get the Sadly, No! guys to photoshop Tim Geithner’s head onto Pam Tillis’s body.]
  7. Remind the blogsphere of Simon Johnson’s answer to Question 8:

    8. How many of the largest 5 banks will likely end up with government as majority owner?

    – Any honest market-based valuation of bank assets will show a majority of large banks are presently insolvent but can be righted with substantial new capital.

    – If the answer isn’t “at least two,” then either the Treasury does not plan to properly value assets, or someone is not yet prepared to tell the full truth.

  8. Point out that, if you believe the market, there are two banks that are currently Serious Outliers in Book-to-Market Value, The Big C and BofA.

  9. Decide not to discuss stress testing, which indicates that Wells Fargo is also seriously endangered, in this post, in large part because of its acquisition of WalkAllOverYa, which had previously acquired World Savings Bank. Leave for later; tell audience not to hold breath.

Now, let’s pretend that past is prologue and that Timmeh! is just making the best deal he can. (Pause for laughter to subside.) Let’s just Focus on the Future.

The Obama Administration is commonly described as planning to ask for $750 Billion in additional “bailout funds.” They are claiming that this should be shown on the budget as $250 Billion, since they expect to get about 2/3s of the funds back over time. [link added, h/t Frank Rich in the NYT]

Given the above details re: The Big C, and the abundant reports with multinational historic examples that shows nowhere near that size of return, why should we be expected to believe them?

With regard to The Big C, I’ll give the penultimate word, once again, to the WSJ editorialists:

Meanwhile, Treasury is forcing the bank to get some new, and presumably more competent, directors. Many of the current directors were going to leave later this spring anyway, but at least this imposes some discipline in return for the federal largesse. Citi’s management will stay in place, at least for now.

Again in a better world, the new board and Treasury would find better managers. But yesterday’s announcement included no roadmap for how the bank plans to restructure, if it even plans to do so. The hope is that it can earn itself back to profitability. More realistically, a bank that has failed as often as Citigroup needs to shrink until it is no longer too big succeed.

As followers of the Iraq War know, Hope is not a Plan. When the WSJ endorses nationalisation, it’s clearly an idea whose time has come.

*We can pretend the asset guarantees—a Really Stupid Idea from people Robert assures me are smart—are independent of the firm; that is, if Goldman or BofA owned them, they would have gotten the same deal.

**I maintain that the current stock price is approximately the price of a two- or three-year call option at a price marginally above the current level—say, $3 or $5—and as such we should rightly view the current stock value as $0.00. But that’s for another post.

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500,000=1,000,000 ? The debate continues.

Robert Waldmann

wrote earlier

In defense of George Will’s claim “According to the University of Illinois’ Arctic Climate Research Center, global sea ice levels now equal those of 1979.” Post ombudsman Andy Alexander provided this link** to a *one page* document which includes the text

“However, observed N. Hemisphere sea ice area is almost one million sq. km below values seen in late 1979 and S. Hemisphere sea ice area is about 0.5 million sq. km above that seen in late 1979, partly offsetting the N.Hemisphere reduction.” Now I thought that 1 million – 0.5 million = -500,000 != 0.

Now Will has written an new column in which he cites the pdf and claims it confirms his assertion, that is, he claims that 1,000,000 = 500,000.

Will has been criticized a good bit. Oddly I haven’t noticed anyone else who has noted the arithmetic error in Alexander’s assertion or his.

Fred Hiatt, in an interview with The Columbia Journalism Review asserts that the issue is that people have contested Will’s inference.

Astonishingly Curtis Brainard of the Columbia Journalism Review agrees and concludes
“The most important [question] seems to be: can inference rise to the level of such absurdity that it becomes subject to the same rigors as evidence?”

I ask if Brainard actually read the pdf cited by Will in support of his claim. If he answers I will post his answer.

My full comment on Brainard’s post after the jump.

update: New opinion on the question from the Washington Post ombudsman Andrew Alexander after the jump.

You are completely wrong. You assert that the criticism of Will is criticism of inference not of evidence. This is simply false as can be shown by a comparison of Will’s original totally false claim about the evidence and the document he cited in his absurd assertion that his claim, which was proven false by the document, was confirmed by the document.

Will “According to the University of Illinois’ Arctic Climate Research Center, global sea ice levels now equal those of 1979.”

The document cited by Will in his follow up column is

it includes the following words and numbers in the following order
“”However, observed N. Hemisphere sea ice area is almost one million sq. km below values seen in late 1979 and S. Hemisphere sea ice area is about 0.5 million sq. km above that seen in late 1979, partly offsetting the N.Hemisphere reduction.”

Will asserts that one million equals 0.5 million. This is not a question of inference. This is a matter of evidence.

Now Will can argue that the pdf document which he cites is invalid because it reports estimates as if they were exactly accurate. However, it is absolutely impossible for anyone who is able to read and understands that one million is not equal to 0.5 million to claim that Will’s original assertion is true, or false inference based on accurate evidence, or probably false or anything but a totally false claim about the evidence.

The fact that Hiatt claims the disagreement is a disagreement about interpretation and evidence does not mean that Hiatt’s claim is true. In fact, since the disputed document is one page long and, I’m sure, Hiatt’s mathematical ability is up to telling the difference between one million and 0.5 million I think the only thing we can conclude is that Will and Hiatt have chosen to lie about the evidence.

If the question of whether minus one million square miles plus 0.5 million square miles equals zero square miles is a matter of inference not evidence what could possible be a matter of evidence not inference ?

Oh one last question, and I want an answer. Did you read the cited pdf file ?

update: Andrew Alexander has a new column on the controversy.

In this column he revises his original conclusion and concludes that 500,000

The editors who checked the Arctic Research Climate Center Web site believe it did not, on balance, run counter to Will’s assertion that global sea ice levels “now equal those of 1979.” I reviewed the same Web citation and reached a different conclusion.

This time Anderson provided a link to the home page of the center not the pdf which contained the numbers 1 million and 0.5 million. In fact he still doesn’t mention the number 0.5 million or note that it is less than one million. My original post (searrch for 500,000 if you care) noted that he had claimed that this document confirmed Will’s claim, that is, that 500,000 = 1,000,000. Now he tells us he has changed his mind, but, it seems, makes it difficult for us to understand why — that is he doesn’t note that earlier column implied that 500,000 = 1,000,000.

Like Brad DeLong, I am unable to doubt that he posted the link to the one page document without reading the document. Still better late than never.

update IV This is very odd. As quoted by Delong, the March 1 Anderson column contains the link to the pdf “I reviewed the same Web citation and reached a different conclusion.” The column as it now appears on contains only a link to the Center’s home page

The editors who checked the Arctic Research Climate Center Web site believe it did not, on balance, run counter to Will’s assertion that global sea ice levels “now equal those of 1979.” I reviewed the same Web citation and reached a different conclusion.

It appears that Anderson removed information which makes it easy to see how unreasonable alleged beliefs of editors are.

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What Remains of the Keynesian Revolution ?

Robert Waldmann

I like to criticize financies, financial regulators and fresh water economists. I should defend something for once. It is easy to criticize. So I ask to what extent has the IS-LM-Phillips curve model been proven false. Also what useful insights can one gain from the IS-LM-Phillips curve model.

A long long trip down memory lane after the jump.

Update: I honestly just found this article. Click and hope you have access to Jstor.

Keynesian Macroeconomics without the LM Curve David Romer
The Journal of Economic Perspectives, Vol. 14, No. 2 (Spring, 2000), pp. 149-169

Warning. I have really nothing to say which Krugman hasn’t written already at his blog. I realized this after I had typed for a long long time and had proudly finished my little essay.

I am provoked by John Cochrane who said

“It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.”

Just before passing on, I note that Cochrane’s first claim is false. I was exposed in graduate school to an IS-LM model in 1985 (by prof. Larry Summers). Also in 1985 I was a research assistant working on a research paper based on a modified IS-LM model. The authors were Larry Summers and N. Gregory Mankiw. Cochrane’s intellectual history is incorrect. Also, he seems to assume that the fact that something is removed from graduate economics programs is strong evidence that it has been proved false. I think that changes in macroeconomic research have a lot to do with intellectual fashion and little to do with evidence. Thus I am interested in the evidence that the IS-LM-Phillips curve model is false. I think that Cochrane has not thought about which of the 3 blocks has been proven false and about which has recently been assumed to be a useful approximation to reality by, for example, Larry Summers.

To define terms, I assert that a logically consistent theory can be proved false only by facts. There is no doubt that the IS-LM model is ad hoc as in developed during the great depression as part of an effort to understand what was going on. The assumptions at the base of the model were, roughly, those needed so that one could have a depression and so that capitalism could be saved by a jump start. I recall a story I once heard from Stuart Holland — a student of Hicks — about a tutorial with John Hicks where Hicks opened the discussion by asking “What’s wrong with the IS-LM model” As student was shocked and noted that Hicks was the author of the IS-LM model. Hicks replied that it was “a doodle.” Not a model taken seriously by the doodler. A model taken very seriously right now. Something funny happened between 1937 and 2009.

OK starting at the end, the equation which dominated the macroeconomic policy debate in the 60s was the Phillips curve, which, as the name suggests, is not a doodle drawn by John Hicks. It came much later (1961 I think) and was the empirical observation that over roughly 100 years a simple relationship between unemployment and inflation held in UK data.

It was clear at the time that this was not a social law — clearly Germany did not stay on a Phillips curve during the hyperinflation. Milton Friedman pointed out that the pattern made no sense unless one assumed that expected inflation was constant and not affected by actual inflation. He predicted that if there were steady inflation, then the Phillips curve would shift out. He was right.

Hard core old Keynesians shifted to an expectations augmented Phillips curve with adaptive expectations. Lucas, among others, noted that the assumption of adaptive expectations was no more plausible than the assumption of constant expected inflation. In 1973, he predicted that the expectations augmented Phillips curve would shift out. Then there was an oil shock. The debate shifted from pro and anti Phillips to one between Muth supply function afficionados and “New Keynesians” who attempted to base the claim that there were nominal rigidities on analysis of optimizing behavior.

The Phillips curve ceased to be a topic of much academic research. Adaptive expectations augmented Phillips curves contintued to be the basis of Macroeconomic policy. The debate between academic macroeconomists ceased to be relevant to policy makers. The hope was that this was a transitional problem. The new models were very new — examples more that possibly realistic approximations to the economy. The hope was that with more work on the foundations new valid useful models would be developed in around 30 years. Actually this hope was expressed in around 1978. The new useful models are not on the horizon. This is not my topic today.

For my purposes, the point is that the work of Phillips Sr became an example of what not to do (in contrast the work of his son P.C.B. Phillips became an example of how to set the record for most papers published in “Econometrica” but that sure isn’t my topic today). Phillips Sr was discussed in history of thought and taught to undergraduates who, it was assumed, couldn’t handle the math of the new models. Further work on the Phillips curve by academics was devoted to getting nice illustrations for undergraduate text books (hey macroeconomists respond to economic incentives and the economic incentives say “write an undergraduate textbook with nice illustrations”). Embarrassingly, the history of thought and make a nice picture version of the Phillips curve, officially called “The Splitting Model” fit the data. Thus an ad hoc model first presented in an undergraduate text book fit the data out of sample. This caused some amusement but had no effect on the academic debate on macroeconomics.

It also has no role in the current policy debate. I think the reason is simple — the old argument against Keynesian stimulus was “that will just cause inflation.” It has been noticed that deflation is a disaster. It is trivial to understand why deflation is a disaster under the assumption that economic agents have rational expectations and markets clear and whatever you want. The implied inflation forecast from the market for TIPPS and regular treasury bills is zero. Just causing inflation would be pretty good right now.

Now the failure of the Phillips curve can’t imply that the IS-LM model is proved false. It just means that one of the inputs to the IS-LM model is the price level and the model only gives a prediction about real GNP if the price level is determined by something else (say the interaction of IS_LM and Phillips curve) or in the very special case in which a change in the price level other things equal implies zero change in GNP.

The price level appears in the LM curve which gives money demand as a function of nominal GNP and the nominal interest rate. The LM curve is a hypothesis about money balances, GNP and the nominal interest rate. It has been overwhelmingly rejected by the data. Worked great up until 1981, then totally failed. Efforts were made to modify the money demand equation so that it fit the new data. Of course it is possible in year t to fit money demand up until year t. Predictions for t+1 were way off. This held for t going from 1981 to 1986 or 1986 then economist gave up.

At least one Undergraduate Macroeconomics textbook doesn’t even mention the LM curve. Monetary policy is discussed via the assumption that the FED controls the federal funds rate somehow (don’t worry your little heads as to how just note they declare a target and they hit the target). So the model becomes the IS_BB model (BB stands for Ben Bernanke and I sure am not going to talk about the open economy).

Now the fact is that policy makers (especially including BB) rely on the IS-BB adaptive expectations augmented Phillips curve model. If it is a fairy tail which has been proved wrong, we have been counting on it continuously and not just when panicked.

There has been a very broad consensus that it is better to stabilize using monetary policy than fiscal policy. This does not imply that economists agreed that fiscal stimulus doesn’t work. It does not imply that economists agree that the IS part of the model is dead wrong. I have no doubt that it had rather a lot to do with perceptions of the relative ability of Paul Volker and Alan Greenspan compared to Ronald Reagan, Newt Gingrich and George W. Bush Jr. I mean there were polite non ad hominem explanations for the choice, but I don’t believe them.

Now monetary policy is pedal to the metal. The target interest rate is effectively zero. None of the arguments which supported the consensus that monetary stabilization policy is superior to fiscal stabilization policy has any relevance. Ben Bernanke is real smart. He says a fiscal stimulus is needed.

Given that the safe short term nominal interest rate can’t fall any further, Hicks’s doodle says we either have to shift the IS curve to the right (higher GNP for a given real interest rate) or cause the inflation rate to increase (lower real interest rate for given nominal interest rate). Phillips and Muth would agree that they way to do either is what is called fiscal stimulus. All that is needed is that fiscal stimulus increases nominal aggregate demand.

OK so what about criticisms of the IS curve. They aren’t very relevant to the current debate among academic macroeconomists either. One is obvious, the model doesn’t keep track of the federal debt. Needless to say, people haven’t forgotten about the debt. Most economists agree that it would be better if it were lower (even the former proponents of starving the beast have noticed that debt doesn’t reduce the beast’s appetite).

Another is that the old Keynesian model of consumption really really makes no sense and doesn’t fit the data. All existing models which fit the data suggest that national debt will depress consumption and people forecast higher taxes in the future. This can, in the extreme case called Ricardian equivalence, imply that tax cuts have no effect on nominal aggregate demand. It does not imply that increased public spending has no effect on aggregate demand. Krugman presented a model with Ricardian equivalence which implies a public spending muliplier of 1.

Becker and Murphy (a Nobel laureate and the economist whose intelligence has never been rated, in my presence, below tied for first) argue that a multiplier lower than one is more plausible. As far as I can tell, their argument is valid exactly to the extent in which private sector employment can be reduced in 2 ways
1) there are job vacancies — a firm which is trying to hire a worker hasn’t found a suitable worker yet
2) firms don’t post vacancies (start trying to hire a worker) because of the expected cost of finding one.
I don’t see how they get to 50% crowding out that way. I’d be interested in a survey of employers asking how important those 2 factors are right now.

It definitely is *not* enough that increased public employment will drive up private sector nominal wages. That does not crowd out private sector employment except by driving up the nominal interest rate.

In any case, models which imply Ricardian equivalence are rejected by the data. For example, cost of living increases in Social Security old age pensions are associated with increased aggregate consumption. This is pretty much a direct test of the claim that taxes and transfers don’t affect consumption. The increases are common so the estimates are fairly precise. Models with Ricardian equivalence have been popular for a while. However, the idea that current income affects consumption more than expectable discounted future income has not been proved false. If anything it has been proved true. The debate continues (the debates always continue) but the null required for Ricardian equivalence is usually rejected by papers written by people on both sides (the only exception I know of was a regression pretty much of consumption growth on consumption growth times an almost constant and other things which found an insignificant coefficient on the other things).

Here, as usual, there is something which fresh water economists think is proven to be true on the grounds that there might be something wrong with the apparent proof that it is false.

Now this doesn’t mean that the simple model of consumption in the IS-LM model is valid, but it does mean that a model which fits the facts (say the model due to Campbell and Mankiw) has pretty much the same implications for fiscal policy.

OK so I said closed economy so I have one topic left — investment. In the original IS-LM model, investment depended on GNP and the real interest rate. In the data it is well fit by the flexible accelerator which just says that it increases in GDP growth and decreases in the real interest rate. There are modern micro based models of investment. However, they don’t fit the data as well as the flexible accelerator. The dependence of investment on GNP increases multipliers. This does not depend on irrationality, nominal rigidity (at least the accelerator part) or Ricardian non equivalence.

The dependence on the real interest rate often makes the fiscal multiplier zero (the FED can prevent the Treasury from stimulating the economy if it so chooses) but given current monetary policy it implies that increased nominal demand which causes increased inflation (reduced deflation) will cause increased real GNP.

My trip down memory lane causes me to conclude that facts not known to Hicks as he was doodling do not reduce the relevance of his doodle to policy. The only point is that policy makers who are worried about the deficit should be told that spending gives more stimulus bang for the deficit buck than tax cuts. This was true according to Hicks and further evidence on consumption suggests that it is more true than Hicks would have guessed.

I admit to the so patient reader that I have no criticisms of Krugman and nothing original to add to what he said. In fact, the post is maybe a contribution to the history of really recent thought as, topic by topic, I might help people understand why Krugman believes what he believes.

Update: However, I don’t mix Indian, Japanese, and Roman metaphors “Tobin was never a guru in the way Milton Friedman was; he never had legions of Samurai ready to spring to the defense of his theories,”

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Treasury and Citi

The WSJ reports on an Obama administration plan to convert US Treasury owned preferred shares to common stock. The plan seems to be an answer to the question “How does one save an insolvent bank without giving a windfall to current shareholders or nationalizing ? “

The government will convert its stake only to the extent that Citigroup can persuade private investors such as sovereign wealth funds do so as well, the people said. The Treasury will match private investors’ conversions dollar-for-dollar up to $25 billion.


The conversion will come at the most-favored price, meaning the government will get the best price of the private shares that are converted. Citigroup has already begun talking with preferred shareholders about the conversion, people familiar with the matter said.

Ah yes that’s it. Seems that smart people work for the US Treasury (OK I know that already).

Under the plan, current common stock will be diluted so much that it is basically worth zero even if Citibank survives. However, since the Treasury will obtain only one share for every share obtained by other investors, it can’t have a majority stake.

Other holders of preferred shares are being told that they have to trade their preferred shares for common stock or Citibank will be allowed to fail. The argument is that they can see how much they can get from Citibank or they can see how much they can get from a bankruptcy judge. someone with 100 preferred shares will free ride. Entities with large stakes will bargain with each other and Citibank and reach a deal. Nothing concentrates the mind like imminent bankruptcy proceedings.

after the jump, I speculate on the next step if this doesn’t solve the problem.

I suppose if Citibank is still insolvent after all institutions which own large amounts of preferred shares have converted to common stock, then the Treasury can announce a similar deal involving bondholders. If they convert the bonds to common stock the Treasury will buy identical bonds and convert them to common stock (inject more cash money for common stock).

In bankruptcy bonds are converted to common stock. The plan is to force large creditors of Citi do it now officially voluntarily without involving a judge, because otherwise there will be huge delays and losses.

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What do You do With a Bunch of Unsold Cars?

by cactus

What do You do With a Bunch of Unsold Cars?

Lloyd’s List had this story the other day:

CAR manufacturer Toyota has so many unsold cars it has had to charter a ship to store them all.

Toyota said today it had chartered a 2,500-capacity vessel which will simply stand idle in port in Malmo, Sweden.

The vessel, belonging to car-carrier specialist Wallenius Wilhelmsen, is necessary because there is simply no more room to store cars at the Toyota import site in Malmo, the company said.

“We have space for 12,500 cars in Malmo, which acts as a distribution centre for all the Nordic countries,” said Toyota spokesman Etienne Plas. “But we have run out of space. We need the ship to store cars while they are waiting to be delivered. Hopefully we won’t need it for that long.”

I don’t have anything to add.
by cactus

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