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

Big Changes at Capital Gains and Games

I go away for a week and the world collapses. While most of you probably noticed that Russell Brand is available again, the other Major Separation was at Capital Gains and Games, which is now exclusively Stan Collender’s as “principal writer and managing editor.”

It is also rebranded “Stan Collender’s Capital Gains and Games.” (The URL remains unchanged.)

Stan has been driving the posting at CG&G for a while now, and this seems, on balance, a good move for everyone, most especially the readers.

In related news, Andrew Samwick has gone back to being a solo artist.* I suspect there are more details in the CG&G posts over the past week, but I’m still catching up.

*If Samwick is the blogsphere equivalent of Sammy Hagar,** then Vox Baby was “I Can’t Drive 55,” while the new one will be…uh, someone help me out here. He’s already got a Brad DeLong link, which may be a better equivalent than the post-VH solo Hagar did.

**Comments game for Nils Lofgren-solo fans: Who are “the Supreme Court of” Economics Bloggers?

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Rick Perry’s 20-20 Vision

Charles Pierce sums up the true issue:

It is on days like this that I don’t envy political economists. They’re the ones that are going to have to take this Message from Goobertown seriously. They’re going to have to score it. They’re going to have to do the math, such as it is, and try to find a coherent formation in this unwieldy parade of hackneyed talking points (Kill the Estate Tax and Save the Family Farm!) and tired applause lines (The Job Creators Are Uncertain!). They’re the ones who are going to have to find a way to square the utter abandonment of the progressive income tax, a balanced-budget amendment to the Constitution, a return to explosively inflationary health-care costs, an unchained and undoubtedly newly amok financial-services industry, and the partial privatization of Social Security, all of which Goodhair has managed to wedge into “Cap, Balance, and Grow (!).”

(By now, I figure the political economists are going to be hopelessly drunk and firing rubber bands at each other.)

They’re the ones who are going to have to tell the family of the sad-eyed young intern in the corner that their son, a Wharton grad with a brilliant future, studied this plan for a couple of hours and then screamed, “But it doesn’t make sense!” prior to trying to feed himself into the fax machine in a vain attempt to get as far as possible from any place where this nonsense is taken seriously.

Personally speaking, I’m not bothering. When you’ve already lost Pete Davis, you can pretty much give up on anyone believing your economics will work:

Governor Rick Perry (R-TX) proposed his tax reform plan today and wrote this Wall Street Journal op-ed. Unfortunately, it’s just a slapdash of slogans. If this plan were enacted as proposed, it would lose a lot of revenue, reward the rich, and complicate filing for most taxpayers.

Giving taxpayers the option would also mean that only those who pay less would opt in, guaranteeing significant revenue loss. [OPENING QUOTE ADDED, sans original links; go read the whole thing]

And Andrew Samwick piles on with the politics:

And now we have another version of the flat tax, as if the crushing irrelevance of Steve Forbes to the primaries in 1996 and 2000 were not an indication of how unproductive the discussion will ultimately be. What are the prospects that a Republican President would actually be able to implement such a change if elected? They are equal to the chance that Republicans will both retain control of the House and secure a filibuster-proof majority in the Senate in 2012. In other words, absolutely zero.

Personally speaking, I don’t think the odds on that election scenario are “absolutely zero” (but I count people like Ben Nelson, who fellated George W Bush from the beginning, referring to him in interviews as “the King,” as part of that “filibuster-proof majority”). But the rest of the analysis is spot-on.

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Small Business=Fraud, Countercyclical Planning, MMT, and Other Economics Catch-up

Note:This was going to be short pieces about things I missed during a week of illness. It turned into a Very Long Piece riffing on two posts from Capital Gains and Games. And that’s without even mentioning the bravura work Stan Collender is doing there: see, for instance, this note that a deficit reduction bill with tax increases is very possible if you just ignore John Boehner.

  1. Small Businesses exist in the United States solely as a vehicle for people to commit tax fraud more easily.

    I don’t see any other realistic conclusion from this piece by Pete Davis. He tries to hide it, putting an idiotic suggestion with an Order of Magnitude’s less value fist, and mostly got people in comments to talk about COLAs, because economists are stupid that way. But the big number—$2,900,000,000,000—remains the big number.

    The only proper conclusion from the entries after the first two would be that Pete Davis can’t do mathis very fond of negative-NPV solutions. You could conclude from this that Pete is really stupid, but we know better. Besides, Len Berman of Forbes already went there, concluding, “Pete, you know better, and you’re just enabling them.” The integrity of posters at CG&G doesn’t usually get questioned so directly in the mainstream.

  2. And there’s good reason for that. Andrew Samwick has argued for years that stealing from the Greenspan Commission’s “making Social Security solvent for future generations” fund, and I expect him to continue to do so, just as I will continue to argue that everything in the Greenspan Commission documents says that was not the idea. But Andrew has me worried—possibly in a good way—about his idea of how to combine economics and family:

    Actually, the government should budget the way families should. It’s just not clear that families actually do what they should. Both families and the government should budget countercyclically — their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

    Now Andrew—who is younger and cuter than I—is starting to sound like the old man telling us to get off his lawn. Either that or he has just discovered that Lifecycle Theory of Economics doesn’t work so smoothly in reality as in the standard models. Or both. So it’s probably safest if I use that paragraph as a springboard to talk about Countercyclical Policy, Rational Expectations, and MMT (below the fold).

The glory of Accounting Identities is that they must be true; the truth of them, though, is that there are many ways to get there. (“What do you want it to be?” is not just a joke; see Point One above.) So let’s start from an Accounting Identity:

Y = C + I + G + NX

Now, Andrew might have argued—and I might have agree conceptually—that transfer payments such as Unemployment Insurance, Social Security, Disability Insurance payments, and Medicare/caid Prescription Drug Coverage should be counted as C, not G. But since Andrew insists that Social Security benefits can be cut without Social Security payments being reduced, he’s clearly treating those payments as part of G, not C.* So I will too.

Now, MMT people—as I think of them, the ones who make certain that only Kevin McHale can “spike” the punchbowl**—argue for Nominal GDP targeting. This would keep the overall risk-free rate (r) relatively stable*** since the components of r combined— π + ie —pretty much has to equal “5” at all times.

Given that, the expectation should that the nominal Yt+1 should equal about 1.05Yt on an annual basis.

Several of you are looking up and saying, “Nu?” So let’s go back, then, to Andrew’s “all should budget countercyclically” claim and see what happens in a stable-NGDP, possibly-MMT, world.****

Let’s make one more assumption (not necessary, just easier for maths): at stable equilibrium,***** π and ie are both equal to 2.5: that is, 2.5% growth, 2.5% inflation. So, all else equal, half of the return on savings is going to be taken by inflation and half of the cost of debt is inflation. In an environment with no tax distortions and in which all lending is done sensibly and prudently (I’d like a pony, too), this is pure realisation of Modigliani-Miller: businesses should be indifferent between raising capital and borrowing, either of which is an Investment (I).

So assume that the growth rate for the economy—as a reminder, that’s the π portion—is expected to be three percent this year (it’s a good year). MMT would tell us that, to stay stable, we have to reduce inflation expectations to 2%. This means draining money from the system to reduce Isl (supply of loans) in the financial system.

(As noted above, at equilibrium, there is just enough loan money to go around. Since this is above equilibrium, profits will be reduced and businesses will have to raise I through capital, not loans.

Andrew would tell us that people in good times want to save more. This means that C should go down, relatively, which means that Isc (supply of capital) goes up.

Since—again, an identity—Is = Isc + Isl, MMT demands that personal savings rise to cover the tighter monetary policy. Just as Andrew wants. And just as is more possible in growth times than tight times.*******

So, ideally, I remains constant, if dIs = dIc. Not my favorite assumption, but a working one.

So far, in the boon environment, C is down and I is, at best, neutral. What about G?

Well, in Andrew-world, government is “saving for a rainy day.” Which means on balance that it’s trying to make more and spend less, just like the family. Which means there are two forces at work—(1) monetary policy, as the interest rate is tightened to control demand and/or reduce inflation, and either (2a) tax rates or (2b) spending cuts in some manner—that are working in the market.

I doubt 2a (tax increases) is the desired method of slowing growth (if you’re MMT-inclined) or stabilizing to equilibrium (which I assume to be Andrew’s goal). So let’s assume spending cuts.

Here those transfer payments come in. As the economy grows, UI costs are reduced. Let’s assume similar, smaller gains in other areas and stipulate that G declines in an above-equilibrium state due to a reduced need for spending—not “spending cuts” per se, but rather people being employed as growth comes.********* Best case scenario, fewer UI payments are made, debt is repurchased with those funds, future liabilities is reduced, and more revenue comes in as business expands—which is used to pay down debt so borrowing can be done more easily (read: at a relatively lower rate) during a downturn.

G declines. As Andrew would want, for good and proper reasons.

Which leaves NX. An expectation of 3% real growth is higher than the market had expected. Currency appreciates; exports become more expensive to buyers, who buy fewer. Imports become less expensive, relatively. dNX is negative (dX=0).

So with moderately higher growth, C, G, and NX all decline, while I either (a) increases slightly (in the absence of the need for and use of monetary policy, and not greater than C declines) or (b) declines (if monetary policy is used to reduce loan demand, since that pesky C0 rather ensures that dIsc |).

If you don’t use monetary policy to drain funds from the system, in which case (C + I) remains relatively stable or rises slightly, NX is more ambiguous (effectively=0), and G still realizes those spending cuts (paying down debt—more tax revenues at the same rate as business expands—which cet. par. increases the spread between r and equity investment and means some of that Is becomes Ic, but that’s a side discussion).

The implications here, and for a downturn example and the full cycle model, are left to the next post.

*This should make it clear that this point was not opened with an ad hominem attack, so anyone who suggests so in comments—even on the basis of “well, I didn’t read below the fold”—will see that comment deleted. Assuming, of course, that I read the comments on a regular basis, so you’re probably safe, if warned.

**Glee, not old NBA, reference.

***Still some uncertainty and timing issues, but a relatively flat but upward sloping yield curve would be a perpetual result.

***The coolest thing about working with everything in Nominal terms is that we can basically eschew calculus and natural logs. The worst thing about working with everything in Nominal terms is…

*****You’re driving down a dessert highway in a two-seater. By the side of the road, miles from the nearest water source, you see A Gorgeous Blond(e), Santa Claus, and an old, tired-looking Stable Equilibrium. Which one do you offer a ride?

A: The Gorgeous Blond(e). The other two are figments of your imagination.******

******Yes, think joke works better with “a brilliant violist.” But this is an economics blog, so live with it.

*******I would quibble Andrew’s statement that people borrowed too much for two reasons: one is that market transactions where the borrower is the one most subject to getting a poorer deal due to issues of asymmetric information hardly call to mind the borrower’s irrationality. Second is that many of those transactions were people “trading up” without clearly taking on a greater burden. (That is, $200K in equity on a NYC 1BR became a $200K down payment toward a home whose costs would be similar or lower, cet. par. The household balance sheet was not necessarily expanded on purchases. (That those purchases were at a higher direct cost than the available OERs is a separate, significant issue.) Similarly, HELOC borrowings that were invested into the property—all those effing marble kitchens for people who don’t know how to cook—are only negative to the balance sheet to the extent that they don’t have a reasonable ROI in the first place. That is, the deadweight loss is probably 30% or less on any portions of HELOCs that were used for Home Improvement projects.

Collaterally, if the HELOC was used in place of savings or 401(k) borrowings or other assets (for those who have same)—or even a higher-interest rate “bank” loan—as the method of buying a new car or other necessity, the fault lies not with the borrower, who made the rational (ex ante) choice to stay invested in “the market” and/or maintain Investments (savings).

In short, since all mortgages and HELOCs have been getting tarred with the same brush, we cannot be certain the extent to which “bad borrowing” was actually bad borrowing, or whether it was just borrowing based on the expectation that jobs and income would remain fairly stable—not drop the f*ck off the cliff and be reduced in even nominal terms for the survivors—concurrent with “investment” values dropping into an abyss.

Anyway, since C0 is still essentially constant (“sticky”) even as income first declines, it is intuitive that saving is easier (consider the effect on S = Income – [C0 + Cchoice] as Income approaches C0) in more prosperous times, on balance, for most of society, distributional effects being constant (or changing incrementally).

*********In such an environment, monetary policy may not be used so proactively. This should be fine for all, given that 5% NGDP is the target, not the absolute. Over time, it will smooth. I guess.

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What it means to be a Conservative Economist Today

Bruce Bartlett posts a note that could have come from me (but, for reasons that will become obvious, did not:

During the 8 Reagan years, when marginal [tax] rates were sharply cut (but deficits were substantial), equities on the NYSE and the S & P 500 about doubled.

During the 4 Bush 41 years, when the top MTR was increased (only slightly), equities rose about 50%.

During the 8 Clinton Years, when MTRs were substantially increased, equities tripled, deficits turned into large surpluses (as far as the eye could see, leading some to fear that the Fed would be unable to conduct monetary policy if the public debt was redeemed).

The market today is roughly where it was (a bit higher) when Bush 43 took over, who cut MTRs, but ballooned the deficit.

So, Bush 41 and Clinton raised MTRs without tanking the economy, and Clinton left Bush 43 with a fabulous fiscal situation.

So much for the Republican argument that reducing MTRs is the nirvana of tax/economic policy and raising MTRs its death knell.

The e-mail was from “a person well known in conservative economic circles” who “asked that [Mr. Bartlett] not use his or her name if I used this information.”

We’re not talking about proprietary information here. And it is saddening that a prominent economist would not be able to discuss such elementary data in public without the promise of anonymity.

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