Relevant and even prescient commentary on news, politics and the economy.

Dr Keynes Prescription

Robert Waldmann

Oddly I imagine debating Niall Ferguson and manage to make a fool of myself.
This requires genius in reverse, so I will post my thoughts as an example of what not to say.

Brad DeLong quotes a “friend” who notes that Ferguson, lacking any valid arguments, attempted unsuccessfully to bait Krugman into losing his cool with comments like

“I rather fear that, at the risk of provoking the man sitting on the other side of me, that it says 1936 on the bottle of Dr. Keynes’ medicine…”

Krugman didn’t take the bait, but I do, after the hump.

My reaction to this is to note that it says 1930 on the patient chart of recent economic data, so maybe the 1936 prescription is what we need.

At length.

It is a tad odd to recommend a 73 year old prescription.

Certainly MDs don’t do that often unless they are dealing with malaria or hypochondria. First, I’d note that the world economy has malaria — a disease which was almost eliminated and has returned due to extreme carelessness and which requires old remedies, the newer remedy of fiscal policy based on long term considerations and steady monetary policy being as ineffective against a recession and liquidity trap as penicillin is against malaria.

But first, I’d object to the implicit analogy. Prof. Ferguson is suggesting that economic science has progressed as much as medical science in the past 73 years. If only. If it were true that saying that Keynes is our best physician is to say that economists have accomplished nothing of value in my lifetime (Krugman’s that is not mine) I wouldn’t hesitate to do so. Clearly Keynes’ remedy is the only hope for a cure for what ails us. The utter idiocy of counterarguments supports the overwhelming evidence from the historical record. If that means that all my efforts (Krugman’s great efforts not my occasional dabbling in actual research) and those of all my economist contemporaries have been wasted, then so be it. It is better to face a painful truth than to reject reality.

However, I think economics has only failed to the extent that it has set to high a standard for itself — Physics (this is Krugman speaking I am more inclined to just say it has failed). Indeed if we followed Ferguson and make the analogy with physic not physics, we see how it is possible that Keynes’ prescription is the right one and that later economists have made constributions of value.

Physics is unique among the sciences because it aims for theories which are both simple and universally valid — that is, pretty much, the definition of physics. Chemists don’t claim that their research is relevant to understanding what is going on in the center of the sun, Biologists don’t imagine that their results have any relevance to living things on other planets if any. Except in physics, and again by definition, natural scientists aim to develop theories which are valid for a limited range of conditions. To be a natural scientist is to attempt to find explanations which are consistent with the laws of physics but not, necessarily, to be a physicist.

The problem with economic theorists and the reason many have abandoned the valid insights of Keynes is that they have aimed for a general theory, when they should

Oh shit. I just said Keynes’ work good “General Theory” very bad. Major blush.

I do think that. I think that economists have something useful to say when they stick close to the evidence which can, along with common sense identifying assumptions which people have trouble doubting, give useful answers to specific practical questions. However when they attempt to find universally valid theories they immediately abandon the idea that theories have to fit all the available facts and present universally invalid theories.

But I am defending dr Keynes who wrote a book entitled The General Theory of Employment Interest and Money and I have totally humiliated myself by saying that the one thing economists shouldn’t do is attempt a general theory. Amusing no ?
However, this post is too long, so I will reflect on why my rejection of the aim for a general theory is consistent with my admiration for “The General Theory …” in another post.

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UnReal Business Cycle

Via Dr. Black, those RBC models may be missing a variable or two:

In April, the rate in the United States rose to 8.9 percent. When the European figures are compiled, it seems likely that the American rate will be higher for the first time since Eurostat began compiling the numbers in 1993….

First, it appears that the safety nets in many Western European economies made it easier for people to keep their jobs as the economy declined. In Germany, programs allow companies to get government help in paying workers, for example, keeping them employed. If the recession becomes severe enough and long enough, of course, it could turn out those programs do not so much avoid the pain as defer it.

Because the alternatives are either direct government unemployment benefits on top of a decrease in GDP or a decline in social welfare with generational implications.

Another factor may be the lack of an economic boom in many European countries, which has left them less vulnerable to recession-related cutbacks.

Ah, pure RBC theory: the seeds of the next recession are sown in the economic growth that preceded it, even if that growth was somewhat enhanced by long-term liabilities:

Interesting, not unrelated, notes:

Then, the United States had an unemployment rate of 4.7 percent, lower than all but three of the 15 European Union countries — Denmark, the Netherlands and Ireland — and equal to that of a fourth, Luxembourg.

As the graphic shows, the March rate for the United States was higher than the rates of 11 of the 15. The exceptions were Portugal, which has the same rate, and Spain, Ireland and France.

The Irish story was truly a country-wide “miracle,” now featuring both higher highs and lower lows than even the U.S.

Spain and Ireland, two of the highest unemployment countries in Western Europe, suffered housing booms and busts that were comparable to the cycle in the United States.

Spanish banks hit the news earlier this week. U.S. banks are evermore heavily subsidized by the U.S. taxpayer (or that taxpayer’s debt; see above). Or, as Robert Lucas told Arjo Klamer in May of 1982:

But I don’t think unemployment is at the center of the story [of the Great Depression]. For those who do think it is the center, I can see why they don’t look to me for enlightment.

What a difference 27 years makes.

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NW Plan: Combined OAS and DI Triggers

(Update: input numbers by Coberly the Office of the Actuary of SSA; calculations and output numbers by Coberly)

Click to enlarge. This is what the result of implementing DI and OAS Triggers immediately would look like. 100% of scheduled benefits, no increase in retirement age, ending Trust Fund ratio of 123. This should be considered a baseline for policy, it may be that we would want to target policy in ways that would reduce ultimate tax rates, and it may be that the economy just does that for us. But this is what a tax based fix looks like: a couple of years of adjustments initially, a decade of small adjustments after 2026, followed by long stretches when no changes need be made at all.

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Deficit from 12.9 to 3 per cent?


Bloomberg reports on

Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

The benchmark 10-year Treasury yield jumped 17 basis points to 3.36 percent yesterday and was unchanged as of 12:18 p.m. in London. The Standard & Poor’s 500 Stock Index fell 1.7 percent to 888.33 yesterday. The dollar tumbled 0.5 percent today to $1.3957 per euro after a 0.8 percent drop yesterday.

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It Rarely Happens But What Goes Around Can, Potentially, Come Around

by cactus

It Rarely Happens But What Goes Around Can, Potentially, Come Around

Dear Mr. Obama,

Incriminating information about a certain individual has come to my attention. In the 1980s, this individual praised and defended a small cabal that worked its way into the highest levels of government and then sold modern American military equipment to Iran in violation of any number of laws. In the 1990s, that individual would himself head an international organization that had dealings with Iran and Libya. He would also work to make it easier for others to deal with those rogue nations. In recent years, he was instrumental – by emphasizing false and misleading information from disreputable sources – at creating the conditions which led to the deaths of thousands of American lives, the loss of American prestige, and not incidentally, tremendous strategic benefits for Iran. More recently, he has come across a lot of classified information whose disclosure would put the country at risk. Much of that information is extremely up-to-date. With his history – especially where it pertains to a very hostile state (Iran) – this cannot lead to a happy outcome for the United States.

Fortunately, he has in the past shown a willingness to do what it takes to keep himself out of harm’s way, regardless of the damage to others. Thus, it is likely that he would cough up anything he knows quickly and with little fuss if physically threatened. Still, I would recommend waterboarding him. A lot. By about the 190th time, he’ll have confessed to so many things – true and false – that you’ll be able to use his statements to justify anything at all, from invading Canada to imprisoning his family members forever. I wouldn’t put it past him to accuse his own child of behavior so heinous that decorated war heroes who engage in it are chucked out of the US military with no recourse.

I think I’ve provided enough clues as to this man’s identity for the FBI to locate him. Good luck.


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Income age 65 and over


Executive summary of EBRI stats on:

Income of the Elderly Population Age 65 and Over, 2005

• Latest data: This article reviews the latest available data on the older population’s income (age 65 and older), how it has changed over time, and the elderly’s reliance on these sources.

• Social Security still dominant: In 2005, Social Security was the largest source of income for those currently age 65 and older, accounting for 40.1 percent of their income on average. Pension and annuities income was 19.3 percent, income from assets 13.6 percent, and income from earnings 24.8 percent.

• Income levels: The median (mid-point) income level of the elderly population increased from $12,074 (in constant 2005 dollars) in 1974 to $15,422 in 2005. The average income of the elderly increased from $17,037 in 1974 to $24,418 in 2005.

• Gender differences: Elderly women get more of their income from Social Security (50 percent of income) than elderly men (33.3 percent). Elderly men derive a larger share of their income from employment-based sources, such as earnings (30.5 percent) than elderly women (16.4 percent).
Elderly women are deriving more income from employment-based sources over time, reflecting the growing presence of women in the work force.

I did not find data that included the current situation of pensions and such in this format.

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NW Plan for a Real Social Security Fix Ver 2.0: 2009 Trigger

by Bruce Webb, data by Coberly

Coberly has now produced new spreadsheets updated in light of the new numbers of the 2009 Report. Copies of past and current spreadsheets are available at our Google Group RealSocialSecurityFix‘s Northwest Plan page. (It should be viewable by anyone). The new Trigger ones linked below.
(UPDATE: Hot off the press, the combined OASDI Trigger Plan. Coberly has simplified and improved the labeling and data presentation).

The newest version treats the DI (Disability Insurance) and OAS (Old Age/Survivors Insurance) individually instead as just part of a combined OASDI. This has a few advantages including the big one that it allows a smoothing and phasing of the tax increases in a way that the impact will be barely perceptible in any given year. Moreover it allows those increases to occur or not in relation to specific Triggers.

The Trustees of Social Security measure the health of two insurance programs by two tests: Short Term Actuarial Balance which is measured over a 10 year period and Long Term Actuarial Balance which is measured over a 75 year period. In 2003 they introduced a new measure which calculates that balance over the Infinite Future Horizon. Our view is that Infinite Future was purely a gimmick introduced to allow new huge scary numbers to be introduced, others including some big name economists who are out there defending Social Security disagree. In any event Coberly and I are not going to bother with it, as the numbers run if you fix the 75 year problem you mostly fix the 100 year problem and there is no real gap between year 100 and Infinity anyway. (If you take the actuarial balance for ‘Future Participants’, i.e. everyone under the age of 15 and people yet unborn, the ystem is in long term surplus of $1.2 trillion Table IV.B7.—Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participants)

The NW Plan is designed to kick in right as either DI or OAS fail the test of Short Term Actuarial Balance and phase in tax increases in a way that allows the Trust Fund to meet both the Short Term and Long Term tests. The plans are flexible in that the Trigger points and the size and phasing of the increases can be changed as new Report Years roll in. And rather than quarrell that SSA is too pessimistic or CBO too optimistic we propose to just run with SSA, if CBO turns out to more correct then all the better, you just tinker with the formula giving everyone years and years to plan. That is the NW Plan takes much of the drama out of Social Security.

As it turns out the Trigger point for DI already happened, it failed the Short Term test a year ago. Meaning that changes have to kick in right away. DI Trigger: 2009 Report. This means an increase in the DI portion of the FICA tax by 0.02% 0.20% in 2010, another 0.01% 0.10% in 2011, and another 0.01% 0.10% in 2039 (updating to 2009 numbers caused a small change in the later two dates). For a median income household and assuming the employer/employee spllit this works out around $1 per week in year one.

OAS is a different story, although it too took a hit in 2009 the result was not to move the Trigger much. If the NW Plan had been in effect over the last couple of years none of the attempted hysteria around ‘Vanishing Surplus’ would have happened, in reality events over the last year have only marginally effected the larger picture. OASI Trigger: 2009 Report. Now it looks like restoring Social Security to Short and Long Term Actuarial Balance requires tax boosts of 0.02% 0.20% per year (once again about a $1 a week for the median income household) for the ten years starting in 2026. Starting in 2036 those increases slow to only needing to change every four to ten years.

These numbers are subject to change with every Report Year, in fact that is one of the points. We don’t really now what 2012 is going to bring, CBO and OMB numbers start diverging broadly after that, if we were using CBO numbers for the Northwest Plan the cost of the fix would be roughly half of that shown in the spreadsheets. The NW Plan is designed to be a flexible planning tool that can respond to new data in real time. Or we could lock ourselves into policy based on assumptions about economic performance after the dawn of the 22nd century and on to the Infinite Future. A better choice for those people would be to relax and watch Star Trek. BTW if you want some Social Security Sci-Fi, follow me below the fold.

Because Low Cost is out there. Relatively few people pay attention to Low Cost and this even in the face of a series of years from 1997 to 2003 or so where the economy consistently returned better numbers than even Low Cost projected and so rapidily moved the date of Trust Fund Depletion back and shrank the payroll gap. The years since then have not been as kind to Low Cost but similarly show that Intermediate Cost remains too pessimistic over the long run. Which means that in addition to monitoring Short Term Actuarial Balance we also need to keep an eye on Long Term, simply to avoid over-funding Social Security.

Why is over-funding Social Security a problem? Well I outlined it in one of my first posts at AB, in fact I actually lifted that from a previous post at the Bruce Web prior to my having AB posting privileges. The Danger of Low Cost
This figure is from the original post and so is from the 2008 Report, it is not much changed with the 2009 (see figure II.D6). In this figure a flat line represents a constant TF ratio, meaning that all income equals all costs with enough left over to maintain a constant reserve. But it not healthy for the country or for Social Security for that line to go flat at too high a level. Because that means that Social Security would be relying to a greater degree on interest earned on the Trust Fund. And while there is nothing phony about the excess FICA tax that has been paid since 1983, that was real money borrowed from workers that was put to use in the real economy hopefully in a way that increased productivity down the road. But whatever utility that spending had it is ultimately discounted by the interest being extracted from the future economy and this is particularly so if that interest is just left to compound endlessly. From 2006 Interest on Interest: a Threat If the Trust Fund settles out with a TF ratio of 500 this implies that 25% of Cost is being covered by General Fund transfers in the form of Interest. Well that still leaves Social Security 75% pay-go from current workers. But as the decades go on the people who originally paid in those extra taxes prior to shortfall in 2017 gradually die off leaving this unproductive albatross behind and ultimately retirees are to some degree getting a free ride based on sacrifices made by earlier generations. Indeed if the Trust Fund goes to 1000 then fully half of Cost could be met from Interest, making it into somewhat of a welfare plan.

So how do we escape this possible long term trap? Well I suggested a variety of approaches on my blog in 2005-2006 but they all boil down to targetting Long Term as well as Short Term. I called this the 100/100 Plan in the days before Coberly supplied numbers. Under DI Trigger the TF ratio drops as low as 107 in the mid 2030’s which triggers the third and final increase in 2039 which gradually increases the TF ratio to the 180s. This isn’t a bad spot, it leaves DI as a little over 90% pay-go, but you don’t want to see it go much higher. Meaning that at some point we might want to reverse the 2039 increase and then maybe roll back the 2011 and 2010 increases as well. Because the following is NOT a good outcome.

The pale grey line is DI and alternative II is Intermediate Cost. We want the II line to flatten, but we have no reason for it to continue to rise. Under Low Cost outcomes or anything approaching it we would by 2019 or so seriously considering cancelling the 2039 increase and then potentially rolling back earlier increases to target a 100-200 range for TF ratio. The black line is OASI. Under Intermediate Cost the Trigger point is set around the 2026-2028 date range. Under Low Cost the Trigger point is never reached and in fact we might even to decide to schedule some gradual tax decreases after 2017 to bring total income in line with cost and put the TF on a glide bath to 100/100.

So the Northwest Plan offers both a carrot and a stick. To the extent that Social Security projects not to diliver a 100% benefit it proposes some mild and phased in increases in tax. If workers are able to boost productivity and more importantly in a way that garners them a fairer share in that productivity than they got over the last eight years we can sweeten that with a possible payroll tax rate cut. Don’t want even a small increase in FICA rates in 2026? Demand better Real Wages in the meantime. There is more than one way to skin the cat of retirement security, the Northwest Plan is just a mechanism to keep the opposition from simply slashing future benefits just because they don’t want to pay back the money they borrowed.

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Tax Competition: why it is not a good thing

Cross posted by Linda Beale, ataxingmatter

Linda Beale has a take on tax competition and real costs hidden by gaming the system. Who does pay for the US Naval protection of commerce in the world?

Tax Competition: why it is not a good thingThe Tax Foundation is one of those purported think tanks that preaches (I use the word calculatedly) a strong “free marketarian” ideology. Most of the materials produced come out very anti-tax, anti-government, and pro-big business. Most of the material makes one want more information about who is really paying the Tax Foundation’s bills.

Not surprisingly, the Tax Foundation has now issued a “special report” challenging the Obama administration proposals on international taxation as “a step in the wrong direction” because they “would put U.S.-based companies at a competitive disadvantage in their competition with multinational firms based in other major trading nations.” See Carroll, Bank Secrecy, Tax havens and international Tax Competition, Special Report No. 167, May 13, 2009.

Let’s be clear. When the Tax Foundation argues for tax competition among countries (i.e., lowering of tax rates and losses of revenues in order to attract MNEs from other countries to establish some kind of token presence, usually, in the low-tax country), as it does here, it is not arguing for a policy that benefits ordinary Americans. It is arguing for a policy that would benefit major multinational enterprises located in the United States, ones that want the protection of the U.S. flag (and its flagships) but not the corresponding burden of helping to pay the price for the stability at home and the armed and diplomatic forces abroad that are so important to US MNEs when they do business offshore.

Similarly, when the Tax Foundation argues, as it does in the email message sending out the report, that the U.S. tax system is “out-of-line internationally” because it “has made no major change in its corporate tax in over 20 years”, it is just plain wrong. When I began practice at Cleary Gottlieb in late 1995, there was a good bit of discussion in the Clinton administration and among congressional representatives about corporate tax shelters and the need to crack down. Doggett began proposing his economic codification bill, but the corporate lobbyists were able to defeat it, time after time. There was at the same time quite a long “wish list” of items that corporate lobbyists wanted to see passed in the tax code. Many in that corporate wish list were passed by the Bush Administration working with a Republican congress in the 2004 tax bills. One heard there’d even been an explicit tradeoff–the Republicans planned to pass their huge individual tax cuts in the 2003 bills (the one that gave the wealthiest Americans tens or hundreds of thousands in annual reductions of tax bills), and then the corporations will get what they want in the 2004 bill. What kinds of things were passed to favor corporations? How about the 2004 erroneously named “Jobs Act” provision permitting repatriation of long-held overseas profits at a pittance of the tax rate that should apply? That was a meritless giveaway for no purpose other than lowering (even further) the already low tax liabilities of U.S. MNEs. The US MNEs that had been “good” citizens, repatriating their profits regularly and paying at least some share of the appropriate burden, were stiffed by the competitive disadvantage created by this provision for the “bad” citizens. Companies that had held out and lobbied for the repatriation provision were able to bring back billions with extraordinarily low taxation, and then plan to hold out on any further repatriation until they could get a similar bill passed again in the future. The bill claimed it would create jobs. But there was no job creation requirement for getting the low tax rate! In fact, many of the companies that made a killing out of repatriating large sums at very low tax also laid off workers. Similarly, the enormous expansion of the expensing provisions under section 179 and section 168 have provided a gigantic tax writeoff for U.S. MNEs–upfront expensing does not comport with the economic decline in value of property and operates as a huge tax cut. The same is true of the R&D credit and the “manufacturing” deduction. There have, in fact, been a series of provisions that are “tax expenditures” favoring corporations amounting to billions of dollars. All of these things the Tax Foundation glibly disregards.

The Tax Foundation argues too that the OECD harmful tax practices initiative is itself problematic, suggesting that the paltry amendments by various nations to their information exchange problems have addressed the issues. Not so. If it were true, we would not be in a battle with Swizterland to force disclosure of names, where the Swiss banks says they can’t provide information unless the request is made for specific accounts, but there can’t be requests for specific accounts if the swiss banks have served to hide the information from the U.S. The information exchange provisions that the Tax Foundation suggests are sufficient, in other words, are merely window dressing. They do not do the job that is needed to prevent wealthy taxpayers from hiding their assets offshore to avoid taxation.

Similarly, the Tax Foundation insists that low tax rates should not be considered a harmful tax practice because it “is a legitimate way to expand a nation’s tax base and increase the living standards of all residents.” The latter, of course, is highly questionable in the case of tax havens like Bermuda or the Cayman Islands–those whose living standards are increased are generally the owners and managers of the MNEs taking advantage of the low tax rates to stiff their home country on the taxes due or the various parasitic law firms and others that make millions off of facilitating that stiffing. Competition between countries for the business of MNEs who treat countries as fungible entities so that they can pay labor the least and owners the most possible is not a public good.

The Tax Foundation also continues to compound the misrepresentation of the US comparative tax burden by emphasizing the statutory corporate tax rate rather than the average effective tax rate or the overall tax burden in the US and other countries. This is problematic for several reasons. The US statutory rate provides a very misleading picture of the relative tax burden of the US compared to other countries, because of the large amount of subsidy provided to US corporations through tax expenditures. Moreover, overly aggressive tax planning by large MNEs significantly reduces the corporate tax burden, since these sheltering transactions may not be found on audit or may not be adequately reviewed to find the aggressive position taken, resulting in companies paying taxes on a lesser amount of income than would be the case if the standards for reporting were stiffer and enforcement harsher. In fact, the average effective tax rate on large US corproations that do pay tax is substantially lower than the 39.25% combined national and subnational statutory rate that is cited in the Tax Foundation report. Additionally, other countries typically have a significant VAT tax as well as the corporate income tax (and often many additional excise-type taxes). Accordingly, the overall tax burden is very different from that portrayed solely by looking at corporate income tax rates. The Tax Foundation claims that the same “trends” apply to overall tax systems, relying on its own study that looked at the effective marginal tax rates, and asserts that average tax rates is not adequate, since it disregards the non-corporate sector. But this argument surely is a strawman–entities have a choice of form in the US. There are advantages to operating in the corporate form, and a corporation that chooses those advantages should bear a fair share of the costs of providing them (from regulatory apparatus to general law enforcement to defense apparatus).

The Tax Foundation implies that US MNEs pay the high US corporate tax rate on their foreign source income. However, that disregards the fact that US MNEs actually game the system to use foreign tax credits to reduce their US source income taxation–a reason for some of the rules proposed by the Obama administration.

Tax competition is merely one more tool in the corporatist agenda toolbox. It is not a public good, but a harmful result of globalization and the fungibility of money and, increasingly, labor. Capital owners benefit, but everybody else loses when countries’ ability to raise appropriate revenues from the business sector is undermined by tax competition.

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