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A Simple Question about NGDP Targeting

by Mike Kimel

A Simple Question about NGDP Targeting

It seems that a big part of the econosphere these days talks about NGDP targeting. Translating this into English, a number of economists believe the Fed should be adjusting monetary policy to achieve a desired level of nominal GDP in any given year. To be very precise, both the economese and the English should be adjusted slightly to explain what is really meant: the Fed should be adjusting monetary policy to achieve a given desired rate of nominal GDP in any given year

To me there are two very obvious problems with this. The first should be evident to anyone who ever spent time in South America in the 1970s or 1980s, or has so much as heard of, say, Zimbabwe or the Weimar Republic: why should the Fed or anyone else care about nominal growth rates? Nominal figures are useful for Sowellizing, which apparently can be very profitable, but in the end, only inflation adjusted figures tells us whether we’re better off or not.

But there is a second problem, and the easiest way to state it is by analogy. Think of the Fed as the quarterback on an American football team. I don’t much like American football, but it is evident that the goal of a quarterback is not to throw a specific number of completed passes, or even to get certain score the board. The goal is to do what it takes to win the game. Getting 28 points doesn’t help you if the other team walks away with 35. On the other hand, 28 to 21 achieves the quarterback’s goal nicely. (And of course, whether 28 points looks impressive or not depends on a number things, including the condition of your teammates and the other team’s defense.) For a good quarterback, winning the game sometimes means mostly staying out of the way, while at other times it means taking charge. But specific measurable numbers mean nothing in the end.

Now, the Fed has a dual mandate (imposed by law): set policy to maximize employment and keep prices stable. Of course, the two goals conflict to some extent. Stable prices means keeping inflation rates at about zero, which nobody advocates as it would generate slow economic growth (and thus low levels of employment). Maximizing employment could be accomplishing economic growth rates, but the Fed often tries to slow down growth rates in order to prevent the onset of inflation.

The Fed is left with something that loosely translates as this: “try to get the economy to grow as quickly as possible without setting off too much inflation.” It accomplishes that goal to a greater or lesser extent at different times.

But given the number of moving parts out there, that seems to be a much easier, and much more logical approach than saying: let’s shoot for a 3% increase in nominal GDP this year.

Lest this post be seen as a defense of the way the Fed does its job, I should note: I personally think the Fed has been doing a very poor job for quite a while, and some of my earliest posts are criticisms of the Fed. I’m especially horrified by the Fed’s approach to the economic mess we’re in – as I’ve been noting since 2008, ensuring that institutions with insane and harmful business models survive to engage in more spectacularly bad behavior is no way to help the economy, and that is true whether one has NGDP targets or not.

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The Numbers Behind Newt’s Plan to Balance the Budget

by Mike Kimel

The Numbers Behind Newt’s Plan to Balance the Budget

Newt Gingrich’s website provides information on The Gingrich Jobs and Prosperity Plan. It starts with this:

America only works when Americans are working. Newt has a pro-growth strategy similar to the proven policies used when he was Speaker to balance the budget, pay down the debt, and create jobs.

Excellent. That statement should be enough to get an idea of what the program will look like. I want to focus on the first piece: balancing the budget. (You can’t pay down the debt unless you run a surplus, so balancing the budget also deals with that issue.)

Here’s what the surplus / GDP looks like for the years from 1988 to 2004. The gray bar covers the years from 1995 (the Republican Revolution took office, and Newt Gingrich became speaker in 1995) to 1998 (Gingrich resigned as speaker in November 1998.)

(Incidentally – the surplus is simply Total Federal Receipts less Total Federal Expenditures, which come from lines 37 and 40 of the BEA’s National Income and Product Accounts Table 3.2. GDP comes also comes from the BEA.)

Figure 1

As you can see, the deficit did indeed turn into a surplus when Gingrich was in office. However, the chart makes it clear the trend began before Newt took office and continued after Newt left office. In fact, it seems that the deficit started falling in 1993. The surplus, on the other hand, peaked in the year 2000, fell, and the budget returned to a deficit. So what defined the years from 1993-2000? Oh yeah, they were the years Clinton was President. So Newt is basically saying he would support the policies that produced success in the Clinton years.

That is wonderful… those were years of great prosperity. You have to go back to the JFK & LBJ years to find presidents who oversaw faster growth rates in real GDP. But let’s stay focused on the deficit and surplus issue. In fact, let’s deconstruct the number into its constituent parts. Figure 2 shows Total Federal Receipts / GDP and Total Federal Expenditures / GDP.

Figure 2.

As is evident from Figure 2, Total Federal Receipts / GDP hit a low point in 1992 and started to rise in 1993, eventually peaking in the year 2000 and then falling. Total Federal Expenditures / GDP hit a high point in 1992, then began falling in 1993, eventually hitting a local nadir in 2000 and then starting to rise again. The trend during the Newt Gingrich years looks like the rest of Clinton years… well, except for a slight slowing in the rate at which expenditures were dropping.

Now, you might be thinking that Newt’s comments about deficit reduction speak more to his views on expenditures than on taxes. After all, few Republicans talk about increasing the tax burden these days and it would take a lot of guts for Newt to break with his party on this one. But looking once more at the numbers its obvious Newt really does want Americans to pay more.

Consider… in 1995, Gingrich’s first year as speaker, federal expenditures were 22% of GDP.In 1998, they were 20% of GDP. But… revenues in 1995 were 19.2% of GDP. That is to say, had revenues remained at the 1995 level, they would have been less than expenditures and the budget would have still been deficit Newt’s last year in office (and in fact, in 1999 as well). But Newt takes credit for balancing the budget.

Thus… by necessity he is taking credit for raising the tax burden on the American people. Granted, there were no hikes in the marginal rate while he was speaker, but the increase in the tax burden came about with increased enforcement and regulation. This is a man with political courage! This is a man who puts doing the right thing above any thoughts of personal gain!

Now, I’d like to put the tax hikes that Newt seems to be advocating in context. For this, I’m going to steal a graph from Presimetrics, the book I coauthored with Michael Kanell. In it, we used a slightly different version of the tax burden: instead of Federal Revenues / GDP, we looked at the percentage of people’s income that went to taxes. We looked at the annualized rate of change of this version of the tax burden for each Congressional administration from 1952 to 2008.

Here’s what we found:

Figure 3.

As Figure 3 shows, the Republican Revolution (which granted, extended a few years beyond Newt) oversaw the largest (by far!!!) annualized increase in the tax burden of any Congress in several decades! Because taxes aren’t that popular with Republicans these days, Newt is downplaying the issue, but he seems to be dogwhistling it for those of with some familiarity with the numbers. The only alternatives are that he is ignorant of the numbers, or that he is will to obfuscate the facts, but hopefully we can expect more than that from someone running for the highest office in the land.

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Peter Diamond, Emmanuel Saez, Paul Krugman and Me!! Looking at Optimal Tax Rates

by Mike Kimel

Peter Diamond, Emmanuel Saez, Paul Krugman and Me!! Looking at Optimal Tax Rates

Via Paul Krugman, I learned of this paper by Peter Diamond and Emmanuel Saez. Diamond, of course, is a Nobel Laureate. I will be shocked if Saez isn’t one too in ten or fifteen years.

Long story made very short, Diamond and Saez jump through a lot of hoops and find that the optimal top marginal income tax rate (all in, that is, including federal, state and local), which they define as maximizing social welfare, is about 73%.

Now, long time readers may recall I’ve been doing this sort of analysis for years, though of course I’ve been looking at tax rates that maximize real GDP growth. Simply put, you cannot maximize long run social welfare if you aren’t maximizing economic growth.

My approach is much simpler than that followed by Diamond and Saez. I like to think its much more intuitive and easier to explain. I note that US data shows a simple quadratic relationship between real GDP growth from one year to the next and tax rates:

growth in real GDP, t to t+1 = f(top marginal tax rate, top marginal tax rate squared, other variables)

One recent post on the topic is here. (Unlike the Laffer curve, the coefficients come out statistically significant and with the right signs.)

I mention all this to note that no matter what I throw into the equation, I find that the top marginal tax rate that maximizes economic growth is somewhere around 65%. Of course, I’ve focused only on federal tax rates… add in state and local it comes pretty close to what Diamond and Saez have found.

As I noted above, my approach is somewhat simpler, and easier to follow than that of Diamond and Saez. Part of the reason is that they come at it from a point of view of elasticities. But with all due respect to my betters (Diamond and Saez, and Krugman as well considering the explanation in his post) I think this is the wrong way to consider the problem. It requires all sorts of assumptions and generalizations about people’s behavior, some of which are both false and create resistance from folks on the right.

For example, there is a notion that raising tax rates will reduce people’s willingness to work… which is only true above certain thresholds. (That threshold, of course, varies per individual.) As anyone who has ever had a business will tell you (when they’re not busy demanding tax reductions), you don’t pay taxes on income from the business if you turn around and reinvest that income. (An accountant would talk to you about decreasing your tax liability by increasing expenses which amounts to the same thing.) You only pay taxes on that income you take that income out, presumably for consumption purposes.

So to simplify, consider an example…. is a successful businessperson more likely to take money out of the business if his/her tax rate is 70% or if its 25%? In general, a person is more likely to take that money at 25%, as there’s less of a penalty. At 70% tax rates, there is more of an incentive to reinvest in the business, creating more growth in the business in subsequent years, and more economic growth thereafter. 70% tax rates are more likely to generate faster economic growth than 25% tax rates precisely because people are self-interested and the higher tax rates induce people to continue investing in things they do well.

(Of course, tax rates can get too high. At 95%, people will reinvest almost every dime… even if they have exhausted every good investment opportunity they have. Thus, to avoid taxes they’ll be making lousy investments which in turn slow economic growth.)

Still, its gratifying to see others who are more, er, credentialed doing similar work. If I might end on a digression, though, I can think of a number of examples of work being done on blogs by people who are essentially hobbyists which is somewhat ahead of the academic literature. However, to a large extent, if something wasn’t published in the academic literature, for all practical purposes it didn’t happen. Which is a shame, because most of us who aren’t academics don’t have time or the resources required for such publication (such as access to econlit). That inevitably slows economic development three ways:

1. the lack of recognition discourages hobbyists who have the potential and otherwise would have the willingness to improve on the existing literature
2. should such hobbyists persist and do the research, that research will not be widely disseminated even if it is an improvement over the academic literature
3. it maintains an insular attitude among those who are not hobbyists. As smart as Diamond, Saez, and Krugman all are, none of them are thinking the way someone running a business thinks of they’d have realized immediately how people who are running a business react to higher and lower tax rates. I have read a lot of academic papers on taxation and have yet to stumble on one that gets it right.

Thanks to Steve Roth of Asymptosis and Jazzbumpa of Retirement Blues for notifying me of Krugman’s post.

And since I always offer… if anyone wants any spreadsheets showing the quadratic relationship between tax rates and economic growth or anything else I’ve done, drop me a line. I’m at my first name (mike) then a period then my last name (kimel – with one m only!!!) at

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The Gold Index, April 1933 – February 1934, Courtesy of Scott Sumner

By Mike Kimel

The Gold Index, April 1933 – February 1934, Courtesy of Scott Sumner

I’ve been having a bit of a back and forth with Scott Sumner of The Money Illusion over the degree to which monetary policy, in particular the devaluation of the dollar, affected the economy in 1933. (My most recent post on the issue is here.)

In private correspondence, Sumner provided me with the draft for three chapters of a manuscript he is working on. I can safely say that whether or not I agree with his findings, Sumner has done his homework – the draft is meticulously researched and abounds with details corroborating his findings. Of particular interest to me was a Table 8.2, which shows weekly figures for a number of series from April 15, 1933 to the first week of February, 1934. Sumner has graciously agreed to let me post that table. I don’t want to freeride on his efforts to much, so I’m only reproducing the first few columns.

Figure 1

I believe the most interesting thing in the table is – what has been the cause of some discussion between the two of us – is the Gold Index. From the footnote to the table in the manuscript:

The gold index is the Annualist Index of Commodity Prices measured in gold terms.

Sumner collected that data manually from old trade journals. I haven’t been able to find that data online. What the data shows, to quote Sumner, is that “an ounce of gold could buy more internationally traded goods in 1934 than 1933. That’s what the 815 to 650 is showing—falling prices in gold terms.”

Here’s a graph of the series:

Figure 2

Addendum by Ken: Here’s the Gold Index data listed above with the Vertical Axis rescaled:

Figure 3

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The Hill reports on "supercommittee"

by Linda Beale

The Hill reports on “supercommittee

Alexander Bolton reports that “With Supercommittee Deadlocked, leaders Reid and Boehner meet“, The Hill (Nov. 15, 2011).  Reid (Dem) and Boehner (GOP) met Tuesday, but aides told The Hill that “They’re not about to dive in” to the negotiations.  But as the committee seems to be at an impasse close to the 11/23 deadline, the leaders must be discussing what is likely to be the next step.  The arrangements for the group (in case no bipartisan deal could be reached) called for across-the-board cuts that impose reasonable cuts on Defense but limited cuts for social safety net/earned benefit programs (medicare limited to 2% cuts to insurance companies and health care providers/Social Security and Medicaid exempt).

The GOP members, of course, are casting it as a Dem problem. For example, Hensarling (a very far right member of the group, from Texas) blamed the Dems for not accepting the Toomey proposal for a piddling $300 billion in new tax revenue.  With Supercommittee Deadlocked, leaders Reid and Boehner meet.

The across-the-board cuts would cut Defense by $500 billion.  Various GOP members of Congress have said they want to change the deal to avoid the cuts to the military.  Tea Party favorite and radical right-winger Jim DeMint has essentially admitted that he never intended to stick with the sequester deal, saying that the GOP has “until next election to fix this thing.”  GOP stalwarts want the US to maintain its exorbitant spending as “the world’s only military superpower” even while being willing to cut health care and pensions to the vulnerable and even while the country’s infrastructure–essential for business–crumbles in ruins.  McCain and Graham urged the Senate to reject the sequester of military funds, fearful it would “set off a swift decline of the United States as the world’s leading military power.” Dems gain upper hand in deficit talks, The Hill (Nov. 16, 2011).  This attitude seems to believe that defense spending, no matter what the cost to the country, is okay, while spending on poor people is a waste and raising taxes on the rich is an impossibility.  Apparently GOP McKeon considered that possibility, but then later backtracked.  Certainly, Grover Norquist has been making sure the pressure is on from the corporate masters of our pseudo-democracy–the Hill notes Norquist’s statement Monday that both Senate and House GOP leaders had “assured him they would not raise taxes to reduce the deficit.”  Id.

So we have elected representatives in Congress who willfully ignore the will of the majority of people in favor of higher taxes and higher taxes on the rich and corporations in particular; ignore the facts that show that higher taxes on the rich and a more equal economy are better for everybody; and ignore the fact that their own policies (preemptive war and tax cuts during deficits from 2001-2008 under Bush) represent the substantial reason for long-term deficits–all in order to continue to support extraordinarily disproportionate spending on the military rather than on public infrastructure, education and health and in order to be able to continue to use the self-created “debt crisis” to push for further impoverization of America’s middle class.  What a backwards value system that represents can’t be expressed in a public blog.

But at least Reid has said that method of reneging on the agreement won’t be allowed to happen: “Democrats aren’t going to take an unfair, unrealistic load directed toward domestic discretionary spending and take it away from the military.”    See Id.; see also Reid: Dems will oppose efforts to spare Defense from automatic cuts, The Hil (Nov. 14, 2011).

As one of the commenters on The Hill notes (quoting an NPR program), the supercommittee is set up to force one of two bad choices–reducing the social safety net or cutbacks during economic recession.  What we should be doing is increasing taxes now on the rich and on corporations, and then allowing the Bush tax cuts to expire at the end of next year–in their entirety.  We should make judicious spending cuts in wasteful programs–and the military certainly should be a target of some of those cuts.  And we should make judicious spending increases in infrastructure, research and educational support programs to add stimulus to keep the economy going.

Case in point–the New York Times story today about a small town in Kentucky that decided to increase taxes to pay for infrastructure improvements that are putting the two back on the map.

originally published at  ataxingmatter

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Scaling to New Depths* with Scott Sumner

by Mike Kimel

Scaling to New Depths* with Scott Sumner

I’ve been having a bit of back and forth with Scott Sumner. Here is his latest post, helpfully entitled: “A suggestion for Mike Kimel.”

His key suggestion:

“Please take a close look at the data from the Great Depression, before doing more posts claiming I don’t know the facts.”

He then goes on to point out he’s been studying the 1933 period for 20 years. From there he goes on to explain my first mistake:

He insists that FDR’s dollar depreciation program began in October 1933, even though all economic historians agree in began in mid-April 1933, when the exchange rate for the dollar began declining (against gold and against other currencies.) He insists prices began rising before FDR took office off, which is not true. He presents a graph that he claims shows prices rising before FDR took office, but his graph shows inflation rates, not the price level. In fact, the graph actually supports my argument that inflation didn’t turn positive until after FDR took office. There’s a difference between the rate of inflation and the price level.

OK. Let’s redo the graph showing not inflation but rather the price level. And I’ll keep it very simple… I will limit it to two points. Well, three, though the third is not exactly on the curve so to speak. As before, I’m still using PPI because its the publicly available source most closely related to the prices Sumner seems to be discussing, and I’ll use the graphics tool at the Federal Reserve Economic Database (FRED)

Figure 1.

The graph shows the PPI for February and March of 1933. FDR took office in March 1933.

As I noted in my previous post,

You can see the decline in prices halt and start reversing even before he took office.

Now, I don’t remember arguing that inflation didn’t turn positive before then. To me, its a big deal that PPI hit rock bottom and reversed itself. Getting out of free-fall was in itself a big deal. Here’s a graph for 1929 to 1934 to give you an idea:

Figure 2.

Note that February 1933 happened to be the low point for PPI during its entire history, and the PPI had been calculated since 1913.

But there’s another important point in the quote I provided above, namely this:

He insists that FDR’s dollar depreciation program began in October 1933, even though all economic historians agree in began in mid-April 1933, when the exchange rate for the dollar began declining (against gold and against other currencies.)

This isn’t quite right. As I’ll make clear, I don’t think the dollar actually depreciated against gold until January 1934. Sumner was so insistent on this depreciation occurring before then that I spent a bit of time on google and found a story by Jesse Jones, head of the Reconstruction Finance Corporation, about how FDR had him and soon to be Treasury Secretary Morgenthau help him (FDR) revalue the price of gold.

Now, I am not an economic historian, and I’m not sure I know any these days, so for all I know, Sumner is correct about what all economic historians agree happened. I am, instead a data guy. I like data. Scratch that. I love data. I go through data in my spare time. Most of the stuff I do at this blog, for instance, has absolutely nothing to do with my day job. Nothing. But its an opportunity to play with data. My wife usually scratches her head wondering why I do this kind of thing, but everyone needs a hobby and I don’t watch tv.

One thing I’ve learned with data is that its generally important to go back as close to the original source of data as possible. Another is to know something about your sources. Go through the data. Read footnotes.

So in that spirit, I decided to try see what I can learn by looking for data from the era or thereabouts, ideally coming directly from the folks who collect it. I have not succeeded in finding a series that shows what Sumner claims. In fact, data from around that era, particularly on gold prices, isn’t easy to come by. But I have found a few examples.

For instance, Table Number 230 of the 1936 Statistical Abstract of the United States shows the supply of gold in the United States on June 30 of each year (going back annually to 1887, and with selected years before then). The data seems to originate with the Treasury and the Fed, though I haven’t been able to locate the contemporaneous originals.

Footnote 1 reads in part:

By a proclamation of the President dated Jan. 31, 1934 the weight of the gold dollar was reduced from 25.8 to 15 5/21 grains of gold, 0.9 fine. The value of gold is therefore based on $35 per fine ounce beginning June 1934; theretofore it is based on $20.67 per fine ounce.

In other words a couple months after Sumner and other economic historians believe the dollar had started losing value against gold, the Fed and/or the Treasury were reporting to the Census (which publishes the Statistical Abstract) that the price of gold was still exactly the same as it had been.)

Now, its possible the Census or the Fed or the Treasury made a mistake and it went uncorrected by the time of the 1936 Statistical Abstract. So one source is not enough, especially when Sumner and “all economic historians” agree it is wrong.

Which leads to a Fed document called Banking and Monetary Statistics 1914 – 1941. This is from the section on gold (bottom paragraph, left hand column, page 522)

All figures are in dollars, calculated at the rate of $20.67 per fine ounce of gold through January 1934 and $35 per fine ounce thereafter (except that the figures for the year 1934 in Table 159 are based upon the $35 gold price). The change in rate results from the fact that on January 31, 1934, the dollar was devalued by 40.94 per cent in terms of gold in accordance with a proclamation issued by the President.

If you’re curious, $35 – $20.67 = $14.33. $14.33 happens to be 40.94% of $35.

The document is chock full of tables that show, including other things, the monthly value of US gold holdings. Where dollar figures are involved, those tables also carry a helpful note indicating the price as $20.67 an ounce through January 1934, and $35 an ounce thereafter. Note that the Fed valued monthly holdings at $20.67 an ounce in April, May, June, July, August, September, October, November and December of 1933 when, all along, according to Scott Sumner who spent 20 years studying the era and “all economic historians,” insist the price of gold had been rising at the time.

I’ve stumbled on a few other sources as well but they don’t look any different. I’m just not seeing the series that shows the dollar price of gold rising during the months from April 1933 to January 1934.

So what is going on? I’m going to split the baby here and suggest that both Scott Sumner and “all economic historians” are right that there was a devaluation, and the Fed and the Treasury and the Statistical Abstract of the United States were (and are) right that there wasn’t. But the way in which they are right is very definitely not a good thing for Scott Sumner and “all economic historians.”

See, as I said above, I’m not an economic historian, but I did spend my formative years in South American in the 1970s and 1980s. As anyone who spent roughly the same years in the region as I did could tell you, or as any Zimbabwean can do today, during times of turmoil (which can last decades) the official exchange rate can come to bear no relationship with the actual price at which a currency trades against something that is considered more stable and more desirable to hold. Heck, you don’t have to track down someone from Arrgentina or Zimbabwe – ask any European who ever visited the Soviet Block and traded in some Western currency at the airport or the border about how unrealistic official exchange rates could be. In many an economic basket case, the likelihood that a transaction takes place at anything resembling the official exchange rate is similar to the probability that someone walks into a Chevrolet dealership and pays the MSRP, in cash.

And like the MSRP, the official exchange rate has a purpose. Yes, there’s always someone clueless or coerced enough to pay that price. But for the most part, its a fiction that either serves as a baseline for something or papers over something the government wants to really do, usually printing money. Its a handy excuse to get from point A to point B, and if the excuse doesn’t fly, another one will do.

My guess, and I’ll repeat that I’m not an economic historian, is that when FDR and Jones and Morgenthau were picking prices out of the air, it was in that vein. The country was in turmoil when FDR took office, and there were fears that if things got worse there would be an armed insurrection. It wasn’t a time for half measures. My guess is the mood in the White House at the time was best summarized by a quote decades later from the immortal John Candy, “There’s a time to think, and a time to act. And this, gentlemen, is no time to think.”

So what did the fiction of changing the price gold accomplish if nobody else believe that the price had actually changed? I suspect it meant, in practice, that the Reconstruction Finance Corporation could pay more than $20.67 an ounce for gold. And why would the RFC (which, I note, could borrow outside the budget) want to pay more than $20.67 an ounce for gold if that was the price everyone was accepting?

Think of the RFC the way you think of the Fed trying to bail out banks in recent years – loaning money at below market rates to banks who then used the money to buy Treasuries which paid higher rates. In effect, paying more than $20.67 an ounce was a way to funnel riskless profits to banks. (Of course, the RFC often replaced management, but things have gotten permissive as well as more sophisticated in recent decades.)

Which brings us back to Sumner and “all economic historians” being right, at least technically. Yes, the currency was being devalued throughout much of 1933, but no, it wasn’t. Not really. There were a series of fictional devaluations that served a specific purpose, but which nobody else made believe was real (and its possible which almost nobody else was aware were happening – don’t ask me, I’m not an economic historian). Pretending otherwise, and using that fictional data to do an analysis is the equivalent of trying to understand the East German economy in 1974 using the exchange rates a traveler would have received at Checkpoint Charlie during that year.

* The title comes from a book put out by Mad Magazine in the 1970s or 1980s. Sorry I can’t be more specific – it has been a while

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Cut now has a plan, revenue increases have wishful thinking…Supercommittee

by Linda Beale

GOP two-step approach problematic

Discussion continued apace yesterday about the “supercommittee” and the idea of agreeing to agree someday on some revenue increases while going ahead with cuts.

This approach is a terrible one since it gives the obstructionist GOP members just another setting in which to refuse to go ahead with tax increases and to “negotiate” yet again over just what counts as a revenue increase.  Like the gimmicks that became so overused in the 2001, 2003, 2004 Bush tax bills, this “deal” is just another gimmick for the radical right to get its way–cuts to Social Security and Medicare, cuts to all programs intended to help the vulnerable, no cuts to military programs, and no tax increases–especially not for the rich.

Republicans on the right are already arguing for applying “dynamic analysis” which tends, in their versions, to be rosy scenarios of increased growth due to tax cuts:  this is a cop-out way to claim revenue increases that won’t materialize while making actual cuts to much needed social programs.  They are also arguing for dramatic changes in the way the earned benefits programs work–such as means-testing for recipients–as first steps in working towards outright elimination of those programs.  You get comments like those of Jim Jordan (Republican of Ohio) who wrote in an op-ed in USA Today that taxes “should not punish success to satisfy some false definition of balance.”  See Rubin,  Debt Accord May be Two-Step Process, Hensarling Says, Bloomberg (Nov. 14, 2011).

Meanwhile, Jim Jordan (Republican of Ohio) said in a USA Today piece that taxes should not be raised because they “should not punish success to satisfy some false definition of balance.”  Id.

This is a wrongheaded view of taxes.  The radical right uses language about taxes “punishing success” because they see defending the rich from  taxation as their mission.  The rich are defined as “successful”–even if the wealth is merely built on top of inherited wealth and position, and even if the rich did nothing at all to earn the wealth.  Taxes do not punish success.  Taxes are the way that we cooperate together to fund important government programs that serve all of us.  Even when they act as transfer programs that transfer resources to the poor and elderly, they are serving all of us by making our society work better.

originally published at ataxingmatter

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Scott Sumner Digs Deeper

by Mike Kimel

Scott Sumner Digs Deeper

Scott Sumner criticizes my most recent post in which I indicate that Keynesian theory explains growth rates during the New Deal era better than theories proposed by monetarists.

He starts by criticizing this, which I wrote in my earlier post.

Aggregate demand was very slack when FDR took office.

FDR showed up in Washington with a plan to start spending a lot of money and thus boost aggregate demand.

The immediate effect was to convince factories they’d be running down their inventories. That boosted producer prices. It had a much smaller effect on consumer prices because everyone knew the gubmint was going to buy a heck of a lot more producer goods than consumer goods. (The government did buy some consumer goods for the various programs, plus there was a spillover effect, but as the graph clearly shows, the action was on the producer side.)

After a bit of time, the public realized FDR wasn’t planning just a one-off, but rather a sustained program of purchases of industrial items. That led them to start using some of their idle capacity, which meant not just selling the fixed amount that was in inventory. The rate of price increases thus dropped.

GDP increased the fastest rate in the United States peacetime history since data has been kept. There was a big hiccup, of course, in 1937 when the government cut back on spending for a while.

Sumner’s most important point:

Prices didn’t start rising when FDR came to Washington with spending plans; they started rising when he began depreciating the dollar. Furthermore, the weekly rise in the WPI index was highly correlated with weekly increases in the dollar price of gold (i.e. currency depreciation.) And those changes (in gold prices) were caused by explicit statements and actions by FDR. Not by fiscal stimulus, which would be expected to appreciate the dollar.

OK. Using the cool graphical tool from FRED, the Federal Reserve Economic Database, I generated this graph of the series that from what I can tell seems to be Sumner’s favorite price index when discussing the period:

Figure 1.

Now, take a gander at the graph. And bear in mind, FDR was inaugurated in March 1933. But everyone knew what he was going to do, spending-wise, once he showed up. You can see the decline in prices halt and start reversing even before he took office.

Additionally, I’m not sure what Sumner means when he refers to the period when he says FDR “began depreciating the dollar.” There was a gold standard in place going back a long time. That means the value of the dollar was its price in gold. The price of gold was $20.67 an ounce for decades before FDR took office. It was $20.67 an ounce until the Gold Reserve Act of January 30, 1934, when the price of gold was changed to $35 an ounce. (To be precise, the government devalued the dollar on January 31, the day after the Act passed.)

The peak in the curve came in February 1934, days or at most weeks (the index isn’t that precise) after the Gold Reserve Act. Put another way… price inflation using Sumner’s measure peaked when the currency was devalued. That is precisely 100% the opposite of what Sumner wrote.

But there are some extenuating circumstances for Sumner.

(The next paragraph summarizes this story, from the memoirs of Jesse Jones.)

It seems that on October 22, 1933, Jones, the head of the Reconstruction Finance Corporation and Henry Morgenthau, then Farm Credit Administrator but soon to be Treasury Secretary, were told by FDR to come by on October 23 to devaluing the dollar by changing its relationship with gold. The three men – FDR, Morgenthau, and Jones, then went about raising the price of gold by fiat between then and January 31, 1934, when prices came to rest at $35 an ounce, a price where they stayed through 1971.

I assume that’s what Sumner is talking about. So let me modify Figure 1 to only show the period from January to October 1933.

Figure 2.

Now, recall, Sumner’s evidence that the Keynesian view is wrong and the monetary view is right is: “Prices didn’t start rising when FDR came to Washington with spending plans; they started rising when he began depreciating the dollar.”

And yet… the graph shows very clearly that prices started to rise when FDR came to Washington with spending plans, not at the end of October when he began depreciating the dollar. As is very evident from the graph, by that time prices had already been increasing for quite a while. Wholesale prices, by October 1, were up 17% from the beginning of the year. If you started in October of 1933, it wasn’t until December of 1936 before prices increased another 17%.

The point is, Sumner is wrong. He is very wrong about when prices started to rise. He is also very wrong about why prices started to rise. And since “when” and “why” are assumptions in his model, his model is very wrong.

Now, for completeness I’m going to tackle the other thing Sumner mentioned in his post. Sumner’s critique of me includes this:

There are all sorts of the problems with the argument that the inflation of 1933-34 was caused by expectations of fiscal stimulus. First of all, it’s completely at variance with Keynesian theory, which Kimel seems to be trying to defend. Keynesian theory says demand stimulus doesn’t raise prices when there is “slack,” and there has never been more slack in all of American history than in 1933.

The problem for Sumner is that Keynesian theory is merely an extension of good old fashioned Adam Smith. Prices depend on supply and demand. You can have a good or service go up in price locally even as it goes down everywhere else.

As I noted in my earlier post, and he quoted:

The immediate effect was to convince factories they’d be running down their inventories… After a bit of time, the public realized FDR wasn’t planning just a one-off, but rather a sustained program of purchases of industrial items. That led them to start using some of their idle capacity, which meant not just selling the fixed amount that was in inventory. The rate of price increases thus dropped.

Which of course, is very consistent with the timing of events.

None of this is to pick on Sumner. There’s a whole cottage industry dedicated to advancing a story that government spending cannot have a positive effect on the economy during recessions or depressions. The problem for those trying to advance that story is that government spending does seem to correlate with positive effects during those periods. So alternate theories are proposed, and have been proposed for decades. And those theories often make a lot of sense… until you take a close look at the data.

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Super-Congress wants to have its cake and eat it too

by Linda Beale

Super-Congress wants to have its cake and eat it too

So the Democrats and Republicans on the so-called “Super-Committee” that is supposed to find $1.2 trillion in budget reductions/increased revenues within a week now thinks it has a solution–let the regular tax committees (Finance and Ways & Means) come up with the tax revenues, while the Super-Committee will go on and specify the spending cuts.  See Deficit Panel Seeks to Defer Details on Raising Taxes, New York Times (Nov. 14, 2011).

The proposal doesn’t sound like anything that the Dems on the panel should accept.  For a piddling reduction in some of the deductions available to the most affluent individuals, the GOP is willing to lower the rate on those individuals to 28%!  Just more enriching the rich.  The Dems shouldn’t agree to that.  Especially since Grover Norquist thinks that any such agreement would be undone immediately, while any stupid agreement the Dems make to “reforming” (i.e., cutting benefits from) the earned benefits programs will be allowed to take place.

Grover G. Norquist, the president of Americans for Tax Reform, whose antitax pledge has been signed by most Republicans in Congress, said in an interview, “I am not losing any sleep” over the Republicans’ latest proposal. Mr. Norquist said he was confident that, “at the end of the day, the Republican House will not pass a tax increase.”

“As a face-saving measure,” Mr. Norquist said, the deficit reduction panel “could give lots of instructions to the tax-writing committees.” In complying with those instructions, he said, the House and the Senate could pass very different bills.  Id.

It is hard to see why any cuts to the earned benefits programs should be made. Social Security, Medicare and Medicaid are more important now than ever because of the weak economy.  We are a rich country and we can afford these programs.Tax 100% of compensation for Social Security.   And treat all profits interests as compensation income when allocations are received, so that partnerships treat persons as partners only when they have a capital investment in the partnership business.

Let the military be cut at least $750 billion.  And raise the rest through taxes–especially through a progressive estate tax and through eliminating the character preference for capital gains income.

This country is tired of being held hostage by far-right radicals  who don’t understand that the government acts for the people and who don’t give a damn for anybody that isn’t in the top 20% of the income and wealth distribution.  We are tired of the radical right’s anarchistic actions to prevent the government from borrowing money to carry out important programs.  We are tired of the radical right’s stupidity about the economy and its reliance on ideological beliefs in “trickle down” programs to justify tax cuts no matter what situation the country is in.  We are tired of the radical right’s refusal to acknowledge the facts about the failures of the four-decade experiment with reaganomics, during which time the large multinational corporations have been allowed to function like quasi-sovereigns.  We are tired of seeing tax policies that support consolidation of corporate empires and movement of business overseas, while Americans lose jobs and watch their wages decline.


originally published at ataxingmatter

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GOP wants to repeal Dodd-Frank: instead they should listen to Nassim Taleb

by Linda Beale

GOP wants to repeal Dodd-Frank: instead they should listen to Nassim Taleb

Nassim Taleb, the author of the book on long-tail events, suggests in a Nov. 6, 2011 op-ed in the New York Times that “it is only a matter of time before private risktaking leads to another giant bailout like the ones the United States was forced to provide in 2008.”

That’s pretty strong language, and should be cause for worry among those GOP debaters who have been in a pissing contest over how much legislation they can suggest for repeal, like Dodd-Frank, health care reform, and environmental protection.  Instead of defending big banks, the GOP should start thinking about how to break them up.  Instead of suggesting that we need to repeal Dodd-Frank and end regulation of banks, Taleb says we do need  regulation but can’t depend on it alone: “Supervision, regulation, and other forms of monitoring are necessary, but insufficient.”

And instead of defending risk-taking bankers as innovators and entrepreneurs, Congress should be considering measures to undo the incentives for risk taking.  Taleb says–End Bonuses for Bankers.

[I]t’s time for a fundamental reform:  Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever.  In fact, all pay at systemically important financial institutions–big banks, but also some insurance companies and even huge hedge funds–should be strictly regulated.


Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called ‘black swan’ events.

Seems like sound advice.  Bonuses encourage risktaking, and risktaking encourages breakdowns of TBTF banks.  Breakdowns lead to taxpayer bailouts.  To break the chain, deny the bonuses.

The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accmumlate in the financial system and become a catalyst for disaster.  This violates the fundamental rules of capitalism:  Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.

Here Taleb touches on a factor in the expanding risk of our economy–and the expanding immunity of the manager class from the risk they cause.  Corporations provide limited liability to their owners.  And innovations over the last few decades have expanded limited liability to almost all investors even in pass-through entities that pay no entity-level tax, through the limited liability company and the limited liability partnerships. That is one of the reasons I have argued for Congress to enact legislation to restrain the availability of tax-free mergers and reorganizations.  The combination of easily attained limited liability plus easily attained consolidation of entities has been a factor in the growth of the corporatist state.

Taleb has a good point about the incidence of bonuses in the US market system as well.

We trust military and homeland secrutiy personnel with our lives, yet we don’t give them lavish bonuses.  They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail.  For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust.

Eliminating bonuses would make banking boring again, like it was before the repeal of the Glass-Steagall Act.  Boring, in this case, is good.  Congress should consider what kind of legislation could be designed to make bonuses in banking less likely, through tax disincentives or other means.

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