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

Mark Thoma has a Future in Stand-Up Comedy

The readers of the Fiscal Times learn what everyone looking at the alphabet-soup of back-door taxpayer theft (or, as Ben Bernanke calls them, facilities) knows:

There are many ways policy could have been improved; providing more help for state and local governments is high on the list, but I’ll focus on another way: using fiscal policy to help households make up for losses from the recession. This is an important, but too often ignored aspect of recovering from what are known as “balance sheet recessions.”…

The effect on bank balance sheets also varies with the type of recession, and a financial collapse brought about by bad loans is particularly severe. The present recession is an example of this, and policy has done a good job of preventing even worse problems from developing by rebuilding financial sector balance sheets through the bank bailout and other means.

But household balance sheets have not received as much attention. We could have helped households rebuild their balance sheets, and this would have helped banks by lowering the default rate on loans. Instead, we left households to mostly solve their problems on their own, and then helped banks when households could not repay what they owed. [emphasis mine; link his]

At his own blog, Professor Thoma ends—as one should—with one of his better jokes, with a perfect Steven Wright delivery:

[W]e can still learn something and improve policy the next time a balance sheet recession hits the economy.

Policy created and maintained as badly as it has been for the past three years must view that summary as a feature, not a bug.

UPDATE: I see RDan mentioned this earlier today. Is the term “balance sheet recession” not so common as I believe it is?

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Why Healthcare is So Expensive Part MMDCLVI

by Tom Bozzo, cross-posted from Marginal Utility

Competition in (increasing) service quality doesn’t reduce costs:

Dane County’s two hospitals that deliver babies are each spending close to $40 million to spruce up maternity units and related facilities for a simple reason: Young women are key health care consumers, often deciding where their families will seek medical services for decades.

“If you don’t cater to women, you lose your market share,” said Kathy Kostrivas, Meriter’s assistant vice president of women’s health.

Many pregnant women tour both hospitals before choosing where to give birth, some bringing birth plans for each step of labor and delivery, said Holly Halberslaben, director of St. Mary’s family care suites.

“They really do their homework,” Halberslaben said. “It can be their first time in a hospital. You want to retain them.”

The somewhat buried exculpatory case for these investments is that the facilities have been operating near capacity, and the Madison area is the fastest-growing part of Wisconsin apart from some areas in the Twin Cities’ exurban fringe. Nevertheless, the hospitals fairly evenly split a market of just over 7,000 annual births, so $80 million is not an insubstantial cost to recover.

I wonder how many expecting moms really are cross-shopping the facilities for compatibility with birth “plans.”[*] Many if not most of the births sort into the two hospitals on the basis of affiliations that send participants in several of the major local health insurance plans to one hospital or the other. So even a modest amount of gold-plating can represent a large cost per birth on the contestable margin. Granted, in addition to some Cadillac plan participants, the uninsured population has (Hobson’s?) choice as to where to give birth. Though it’s messed up in a whole different way if the hospitals’ business plans would seek to recover a significant share of costs incurred to attract well-to-do moms to these facilities from the uninsured.

[*] When John was born, the plan was to have a healthy baby, which turned out to be the plan that was robust to complications that would have mooted any other plans.

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Balance sheet recessions

Mark Thoma in The Fiscal Times takes a stab at explaining this recession and policy:

As this year comes to a close, and as we finally begin the recovery stage of the recession, it’s a good time to look back and ask how policymakers could have improved their response to the downturn. What can we learn from this recession? How can we do better the next time a large financial shock hits the economy?

There are many ways policy could have been improved; providing more help for state and local governments is high on the list, but I’ll focus on another way: using fiscal policy to help households make up for losses from the recession. This is an important, but too often ignored aspect of recovering from what are known as “balance sheet recessions.”

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Supreme Court rulings and the Roberts Court

The NYT makes note of the US chamber of Commerce and litigation:

The chamber now files briefs in most major business cases. The side it supported in the last term won 13 of 16 cases. Six of those were decided with a majority vote of five justices, and five of those decisions favored the chamber’s side. One of the them was Citizens United, in which the chamber successfully urged the court to guarantee what it called “free corporate speech” by lifting restrictions on campaign spending.

The chamber’s success rate is but one indication of the Roberts court’s leanings on business issues. A new study, prepared for The New York Times by scholars at Northwestern University and the University of Chicago, analyzed some 1,450 decisions since 1953. It showed that the percentage of business cases on the Supreme Court docket has grown in the Roberts years, as has the percentage of cases won by business interests.

The Roberts court, which has completed five terms, ruled for business interests 61 percent of the time, compared with 46 percent in the last five years of the court led by Chief Justice William H. Rehnquist, who died in 2005, and 42 percent by all courts since 1953.

Those differences are statistically significant, the study found. It was prepared by Lee Epstein, a political scientist at Northwestern’s law school; William M. Landes, an economist at the University of Chicago; and Judge Richard A. Posner, who serves on the federal appeals court in Chicago and teaches law at the University of Chicago.

(Dan here: I am am between flights but must maintain conversation with family or else find new home…hoping MG can find the link for us) UPDATE: Links added.

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Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 passes

(Dan here: I am traveling right now and am posting things late or maybe not as tidy as I would like. But posts are coming.)

by Linda Beale
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 passes
crossposted with Ataxingmatter

No big surprise here.  The House on December 16 passed the Senate-approved TRA by a vote of 277-148, clearing it for the President’s signature.  The bill extends the Bush tax cuts for two years and reduces the number of estates subject to the estate tax, and the rate of tax when they are taxed, even below the number subject to the tax in 2009.  It includes the usual “patch” for the AMT for two years, and various tax breaks for businesses–especially expensing provisions that will likely merely result in more pay to managers and more payouts to mostly wealthy shareholders.

Those most vulnerable get the relief from the lower rates (not many dollars for them, of course), the 2% cut in the payroll taxes, and the extension of unemployment compensation.

Those at the top of the wealth and income heap who have garnered almost all the benefits of productivity gains in the economy over the last few decades get most of the benefit of the bill–tens of thousands of dollars of tax relief for the top 20% of the income distribution, substantial estate tax reductions, and none of the burden-sharing that progressives had advocated (such as the carried interest treatment as ordinary income).  The bill even provides what amounts to an interest-free loan to the wealthy who convert regular IRAs to Roth IRAs–the “deal of the century” according to one CPA who services the wealthy.  See Leondis, Tax Measure Gives Deal to Wealthy Roth IRA Converters,, Dec. 17, 2010.  And of course, the bill also lets the wealthy transfer up to $100,000 from regular IRAs to charities without paying the income tax they should have to pay on the appreciation.

All in all, the wealthy made out like bandits in the tax bill.  And in many ways, that is the appropriate way to view them–they have stolen the sustainable livelihood of the middle and lower classes for two decades and are rapidly moving into position to become a ruling oligarchy.  The bill was a big win for corporatism and the wealthy on the right.

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Modeling Sunshine and Shadows: Inequality, long hours and crisis

Tom Walker
(aka Sandwichman at Ecological Headstand)

Modeling Sunshine and Shadows: Inequality, long hours and crisis

Alex Harrowell at A Fistful of Euros sees sunshine beaming from the IMF in a working paper by Michael Kumhof and Romain Rancière that identifies income inequality as a potential source of financial crisis. No shit, Sherlock! Outside of the formal modeling, the proposition hardly sounds remarkable.

As goldilocksisableachblonde noted on Mark Thoma’s site, “This finding is consistent with intuition and common sense , meaning – according to mainstream economic theory backed by models and more models – it’s gotta be wrong.” Kumhof and Rancière themselves note that “the link between income inequality, household indebtedness and crises has been recently discussed…” but they object that the authors “do not make a formally consistent case for that argument.” What they mean by not “formally consistent” is presumably not using a dynamic stochastic general equilibrium (DSGE) model such as they employ. I would like to see K&R try that argument in court.

“Your honor, sir, I object, the videotape of my client breaking open the ATM with a sledgehammer is not a DSGE model and thus is not formally consistent as evidence.”

“Objection overruled.”

But it is well that K&R build their formally consistent model to demonstrate that possibility of something happening, which the rest of us can observe with our naked eyes. This will keep other formally-consistent DSGE model builders busy tinkering with assumptions until they can explain the findings away. I betcha Lee Ohanian could come up with a doozy — and it would get more media!

Anyway, where there is sunshine, there are bound to be shadows and the Sandwichman couldn’t resist the temptation of scouring the working paper for some shade. And here it is:

“Finally, the addition of a shock to workers’ labor supply would help to address an important issue raised by Reich (2010), who emphasizes that in the United States households faced with higher income inequality have employed two other important coping mechanism apart from higher borrowing, namely higher female labor force participation and longer hours. This allowed them to replace some of the lost income, and therefore to limit the amount of additional borrowing.”

Now I haven’t read Bob Reich’s new book but I did the next best thing. I saw him talk about it at a book tour event in Point Reyes Station in October. Reich’s argument is that 1. incomes have stagnated since the early 1980s 2. the first response of households was to increase hours supplied to the labor market to maintain purchasing power but when that strategy ran up against its limit, 3. households began to borrow aggressively. I think Reich has the ingredients right but they’re in the wrong chronological order. That can be crucial when you’re baking a cake or explaining history. Long before incomes began to stagnate, hours of work ceased a century long trend of decline, a trend that BLS economist Joseph Zeisel had called “one of the most persistent and significant trends in the American economy in the past century.”

Not to put too blunt a point on it, Americans suddenly stopped taking part of the gains of technology in the form of leisure. It’s not as if they “just decided” to do this, either. There were all sorts of structural changes in the U.S. labor market that broke the trend. Just to name a few, there was the abandonment of the shorter hours employment strategy by organized labor in favor of promoting economic growth fueled by government spending, there was the explosion of per-employee benefits (quasi-fixed costs) as a proportion of total compensation and there was the FLSA provisions themselves which, in effect, were a double-edged sword with regard to the incentive of overtime pay.

From a long-term historical perspective, hours of work stagnated before wages did. I’m well aware of the post hoc propter hoc fallacy. Just because the hours stagnation came first, doesn’t necessarily mean it caused the wage stagnation. On the other hand, there is a sufficient body of theory suggesting that just such a causal chain is likely.

Ira Steward articulated this theory in the 1860s. Marx also presented a theoretical explanation linking technological advance, immiseration of workers and economic crisis. Sydney J. Chapman confirmed the basis of Steward’s and Marx’s theories but within a neo-classical framework. Dorothy W. Douglas reviewed Steward’s theory during the Depression judged it to be rich in explanatory power, institutionally speaking.

More recently Keynes and Luigi Pasinetti advanced theories that none of the formally-consistent model builders have sought to confirm or refute. Instead, the formally-consistent model builders busied themselves refuting a theory that didn’t exist — that “the amount of work to be done was a fixed quantity.” Not surprisingly, they succeeded in refuting that faux fallacy (in a formally-consistent manner, of course) and figured that was all they needed to do. Steward, Marx, Chapman, Keynes and Pasinetti be damned!

Don’t get me wrong. I think formally modeling realistic assumptions is a huge step forward from formally modeling laughable ones. I’m just not sure I (or the unemployed) can wait another sixty years or so for economists to get around to building a formally-consistent model that reflects the powerful explanatory theories the formal modelers have ignored for the last sixty years.

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What Once was Naivete is Now Idiocy

Update: Brad DeLong appears to confirm that Obama’s inner circle would be best served by being placed in a circular firing squad, given live ammo, and being told to “do what is right.”

The plethora of disingenuous claims that Barack Obama “won” with the McConnell-Obama “compromise” are legend. See, for instance, the idiocy of Andrew Sullivan (of which Andrew Samwick is too generous when he describes it as “poor political tactics“; see also Brad DeLong), and the Administration’s disingenuous “what ‘we’ won” chart.

The big question was how this is supposed to stimulate the economy. Those of us who argued that it would do damage noted that it was the first move.

Obama has so far played (as I noted earlier): 1 g4 e5

Now, Mark Thoma discovers that he really does intend 2 f3 and then will wait for the Republican’s next move:

The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address.

followed soon by what may be the stupidest serious paragraph ever written by someone who isn’t Donald Luskin:

White House strategists believe this can also give Obama “credit” for getting serious about deficit reduction — now more urgent with the nearly $900 billion increase in the deficit via the tax cut deal.

We have always heard that the first Black President would be subject to an increased threat of assassination. Only now do we discover that he intends to commit seppuku.

The optimistic version of his chances for re-election now appears to be the case presented by “Norman” in comments to my previous post (slightly edited for clarity):

If “O” continues his so called compromise—giving in to whatever the right wants—doesn’t pull a LBJ and gets the nod in 2012, the Repubs nominate Sarah [Palin], then it’s quite possible he could win again. Only this time, the Republicans would be a deciding factor in the win. Why? Because they know he will cave on just about everything they ask for.

The only quibble there may be the “just about.”

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The 2% (non) Solution: Part One

by Bruce Webb (cross posted at new dedicated (and partially funded) blog Social Security Defender)

As part of the Tax Cut deal Obama cut with Republicans there was included a one-year cut of 2% of payroll out of the 6.2% employee share of the overall 12.4% of payroll sent to Social Security. This cut was ostensibly designed in a way that held harmless the Trust Funds, the dollars not being sent from paychecks instead being replaced by transfers from the General Fund. Plus the diversion is on paper only temporary. But in reality this deal not only should have raised red flags, it also should have blown reveille and set off the disaster warning klaxons. This deal represents a terrible danger to Social Security in at least two ways and is terrible policy besides. More below the fold.

If the so-called Payroll Tax Holiday stood on its own, you could argue that it is mildly progressive in that for one year it reduced the taxes of everyone on their first $106,800 of income while paying for it out of taxes that are mostly incident on the top 50%. Unfortunately it effectively replaced the expiring Making Work Pay tax credit which directed all of its benefits to families making at most $70,000. The net result may be a tax hike for as many as one in three workers. The whole grim business is described in this Huff Post piece: Obama-Republican Deal Could Mean Tax Hike For One In Three Workers by the appropriately named Ryan Grim. From my point of view the fact that the tradeoff was suggested by Republicans is all you need to know, millionaires will get a tax cut ten times of that of a single person working at FPL in a minimum wage job.

However this particular issue, however important from an economic justice and income inequality standpoint is somewhat peripheral to Social Security itself. And there are plenty of people more qualified than me to comment on it, starting with Mr. Grim, so over to them on this one. Instead I want to discuss two threats posed to Social Security, one that just brings the funding shortfall much closer in time and is pretty well recognized, and a second that is more subtle but presents an existential threat to Social Security itself.

The first threat is fairly simply stated: in today’s Washington D.C. there is no such thing as a ‘temporary’ tax cut. As long as Republicans have anything to say about it (and since they are effectively calling the shots even before they take control of even the House) there is no such thing as restoration of existing levels of taxation after a ‘tax holiday’, instead any such cuts will be presented as a tax increase, in this case a massive one. Because they can and will play games with percentages. That is while the cut is presented as ‘only’ 2% and so to reasonable minds would seem a small part of the revenue flow, it represents 16% of the total revenue flow generated by FICA payroll tax and a whopping 32% of that taken out of workers’ paychecks. Moreover taking the employee share simply back to 2010 levels means an increase from 4.2% to 6.2% or a whopping 47% TAX INCREASE. That is you can expect Obama to get headline credit for a 2% cut but get blamed for a near 50% increase even though it is the same dollars in question.

The anticipated rhetorical spin is only the start of the danger. Social Security Title 2 (what we know as Soc Sec today) has always been a closed system, to paraphrase Lincoln ‘of the worker, by the worker, and for the worker’, having taken nothing directly from capital it owed nothing to capital. Moreover because of the way that its dedicated taxation and later benefit levels were set up it was largely insulated from the Budget and Appropriations process. While opponents of Social Security could and did play games with the 1% of cost related to Administration, an amount that is exposed to those processes, that game playing didn’t put the whole system at risk (though it caused a lot of misery on the Disability Insurance side, where Admin has always been scandalously underfunded). But in 2011 a very substantial chunk of Social Security income will come from the General Fund. And while it is always possible that the next Congress will just ease that General Fund burden by letting the ‘holiday’ lapse on schedule there is no guarantee that they wouldn’t simply leave the 4.2% rate in place while cutting the subsidy from the General Fund and so blowing around a $120 billion hole in the income stream for 2012 and every year after. With the net effect of bringing the projected date of Trust Fund depletion back dramatically from its current 2037 date, perhaps as early as 2020.

Of course this might appear just too raw and hypocritical for the Republicans, that after crying ‘crisis’ they did what they could to precipitate it, but it opens the door for other chicanery. For example the Republicans could offer to leave the 4.2% rate in place, lower the replacement subsidy by 50% and ‘compromise’ by cutting future benefits in a way that offsets the other 50%. And then just repeat this exercise every year in their typical framing of separating “spending we CAN’T afford” (which always seems to be social spending) from “spending we can’t NOT afford” (which seems to be everything military and any efforts to raise revenues).

Social Security has been protected throughout its history by the wall represented by a dedicated payroll tax and a Trust Fund whose reserves were drawn from that same stream. This Administration just breached that wall, apparently in the futile attempt to show ‘seriousness’ and ‘bipartisanship’ which in this case translates to ‘willingness to screw your own base’.

This payroll tax holiday was a terrible policy choice to start with, continuation of Making Work Pay or direct transfers from the General Fund to workers would have been more effective and better targeted stimulus than a tax cut that also flows to millionaires. But the danger is not restricted to the direct breach in the wall. Instead there is a lurking Trojan Horse. Subject of Part Two.

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A Simple Explanation for a Strange Paradox: Why the US Economy Grew Faster When Tax Rates Were High, and Grew Slower When Tax Rates Were

by Mike Kimel

A Simple Explanation for a Strange Paradox: Why the US Economy Grew Faster When Tax Rates Were High, and Grew Slower When Tax Rates Were Low
Cross posted at the Presimetrics blog.

If you are familiar with my writing, you know that for years I have been covering the proverbial non-barking dog: the textbook relationship between taxes and economic growth, namely that higher marginal rates make the economy grow more slowly, is not borne out in real world US data.

Sure, there are a whole raft of academic studies that claim to show just that, but all of them, without fail, rely on rather heroic assumptions, and most of them throw in cherry picked data sets to boot. Leaving out those simple assumptions tends to produce empirical results that fail to abide by the most basic economic theory. This is true for data at the national level and at the state and local level.

Making matters more uncomfortable (and thus explaining all the heroic assumptions and cherry picking of data in the academic literature) is that the correlations between tax rates and economic growth are actually positive. That is to say, it isn’t only that we do not observe any relationship between tax rates and economic growth, in general it turns out that faster economic growth accompanies higher tax rates, not lower ones, and doesn’t take fancy footwork to show that. A few simple graphs and that’s that.

Now, obviously I sound like a lunatic writing this because it goes so far against the grain, but a) I’ve been happy to make my spreadsheets available to any and all comers, and b) others have gotten the same results on their own. Being right in ways that are easily checkable mitigates my being crazy (or a liar, for that matter), but it doesn’t change the uncomfortable fact that data requires a lot of torture before conforming to theory. And yet, that’s the road most economists seem to take, which explains why economics today is as useless as it is. It also speaks poorly of economists. The better approach is come up with theory that fits the facts rather than the other way around.

I’ve tried a few times to explain the relationship that I’ve pointed out so many times, but I never came up with anything that felt quite right. I think I have it now, and it’s very, very simple. Here goes.

1. Economic actors react to incentives more or less rationally. (Feel free to assume “rational expectations” if you have some attachment to the current state of affairs in macro, but it won’t change results much.)
2. There is a government that collects taxes on income. (Note – In a nod to the libertarian folks, we don’t even have to assume anything about what the government does with the taxes. Whether the government burns the money it collects in a bonfire, or uses it to fund road building and control epidemics more efficiently than the private sector can won’t change the basic conclusions of the model.)
3. People want to maximize their more or less smoothed lifetime consumption of stuff plus holdings of wealth. More or less smoothed lifetime consumption means that if given the choice between more lifetime consumption occurring, with the proviso that it happens all at once, or a bit less lifetime consumption that occurs a bit more smoothly over time, they will generally prefer the latter. Stuff means physical and intangible items. People also like holding wealth at any given time, even if they don’t plan to ever spend that wealth, because wealth provides safety, security, and prestige, and for some, the possibility of passing on some bequest.

(If the first two look familiar, they were among 8 assumptions I used last week in an attempt to get where I’m going this time around. Note that I added two words to the second assumption. More on last week’s post later.)

Due to assumptions 1 and 3, people will want to minimize their tax burden at any given time subject provided it doesn’t decrease their lifetime consumption of stuff plus holdings of wealth. Put another way – all else being equal, peoples’ incentive to avoid/evade taxes is higher when tax rates are higher, and that incentive decreases when tax rates go down. Additionally, most people’s behavior, frankly, is not affected by “normal” changes to tax rates; raise or lower the tax rates of someone getting a W-2 and they can’t exactly change the amount of work they do as a result. However, there are some people, most of whom have high actual or potential incomes and/or a relatively large amount of wealth, for whom things are different. For these people, some not insignificant amount of their income in any year comes from “investments” or from the sort of activities for which paychecks can be dialed up or down relatively easily. (I assume none of this is controversial.)

Now, consider the plight of a person who makes a not insignificant amount of their income in any year comes from “investments” or from the sort of activities for which paychecks can be dialed up or down relatively easily, and who wants to reduce their tax burden this year in a way that won’t reduce their total more or less smoothed lifetime consumption of stuff and holdings of wealth. How do they do that? Well, a good accountant can come up with a myriad of ways, but in the end, there’s really one method that reigns supreme, and that is reinvesting the proceeds of one’s income-generating activities back into those income-generating activities. (i.e., reinvest in the business.) But ceteris paribus, reinvesting in the business… generates more income in the future, which is to say, it leads to faster economic growth.

To restate, higher tax rates increase in the incentives to reduce one’s taxable income by investing more in future growth.

A couple acknowledgements if I may. First, I would like to thank the commenters on my last post at the Presimetrics and Angry Bear blogs, as well as Steve Roth for their insights as they really helped me frame this in my mind.

Also, I cannot believe it took me this long to realize this. My wife and I are certainly not subject to the highest tax rate, and yet this is a strategy we follow. At the moment, we are able to live comfortably on my income. As a result, proceeds from the business my wife runs get plowed back into the business. This reduces our tax burden, and not incidentally, increases our expected future income.

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