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

Basic Macroeconomics

by Mike Kimel

Recently I had the opportunity to speak to Professor David Cohen’s class on the US Presidency in the Political Science department at the University of Akron.

My talk was structured around three questions involving some extremely simple recent economic history. None of the questions were trick questions.

The questions appear below.

Question 1. From 1980 to 1992, the top marginal tax income tax rate was:
-70% in 1980
-69.125% in 1981
-50% from 1982 – 1986
-38.25% in 1987
-28% from 1988 – 1990
-31% in 1991 and 1992

Given this pattern, which of the two graphs that follows do you expect shows the growth rate in real GDP over that period?

Figure 1 Option A

Option A: A few years after the first tax cuts, there was one year of unusually strong growth. Subsequent growth slowed a lot, and continued slowing as tax rates fell further.

or…

Figure 1 Option B

Option B: The more tax rates were cut, the faster the economy grew. And then Bush I broke his “read my lips, no new taxes” promise and the economy slowed again.

Question 2.
The following is the list of eight year administrations since 1929:
-FDR (1933 – 1941)
-Truman (1945 – 1953)
-Ike (1953 – 1961)
-JFK/LBJ (1961 – 1969)
-Nixon/Ford (1969 – 1977)
-Reagan (1981 – 1989)
-Clinton (1993 – 2001)
-Bush 2 (2001 – 2009)
(FDR’s first 8 years are included, but the War years are left out. Also, Truman took over a few months into the term.)

It turns out that the degree to which each administration cut the tax burden (i.e., current tax receipts/GDP) during its first two years in office seems to strongly affect the growth rate in real GDP in the subsequent six years in office. (E.g., the amount by which Reagan cut the tax burden from 1980, Carter’s last year in office, to 1982 seems to strongly affect the annualized growth rate in real GDP from 1982 to 1988.)

Which of the following two graphs do you think best explains the relationship that was observed between the change in the tax burden in the first two years of the administration and the subsequent growth in real GDP over the remaining six years?

Figure 2 Option A

Option A: Administrations which reduced tax burdens early on enjoyed rapid growth later. Administrations which increased tax burdens early had poor growth later.

or

Figure 2 Option B

Option B: Administrations which lowered tax burdens early on suffered through poor growth later. Administrations which raised tax burdens early had strong growth later.

Question 3
Reaganomics involved cutting taxes and reducing regulation. The New Deal (for our purposes, not including World War 2 years) involved tax hikes and increased government control over the economy. Which of the following two graphs shows the growth rate in Real GDP over the Reagan and FDR years?

Figure 3 Option A.

Option A. Growth was faster under Reagan than under FDR.

Figure 3 Option B.

Option B. Growth was faster under FDR than under Reagan

(ANSWERS AFTER THE JUMP)

The answers…
1. Option A: A few years after the first tax cuts, there was one year of unusually strong growth. Subsequent growth slowed a lot, and continued slowing as tax rates fell further.
2. Option B: Administrations which lowered tax burdens early on suffered through poor growth later. Administrations which raised tax burdens early had strong growth later.
3. Option B. Growth was faster under FDR than under Reagan. Quite a bit faster, in fact.

By the way… in each of the questions, the data for both options A and B was “real.” Its just the wrong answer, in each case, the growth rates did not match the taxes for any given year, but rather were sorted in order to fit the story line that everyone seems to believe. Also, for Question 2, I could have used the first year, the first three years, the first four years, the first six years, or the first seven years rather than the first two years of the administration v. the remaining years of growth and gotten similar graphs. Using the tax change for the first five years v. the annualized change in growth fro the subsequent three years shows almost no correlation whatsoever. My guess is that’s the outlier, given every other combination shows a recognizable story.

Its also worth noting… the three questions I picked are not “gotcha” questions or special cases. They’re central to the macroeconomic theory that has prevailed in the United States for the past few decades, and which American economists have managed to sell to the rest of the developed world since about 1990. The Reagan tax cuts are usually presented as exhibit A that tax cuts “work.” But I could have used Exhibit B (the so-called Kennedy tax cuts) instead. It wouldn’t have made a difference. The second question is an attempt to show how policies affect the economy the entire time they are in effect. Essentially, all the data available since the BEA began computing GDP is there, except the Hoover years, the Bush 1 years, the Carter years, and WW2. The third question compares what are often referred to as the worst economic policies this country enacted in the past 100 years to what are often referred as the paragon of economic policies in the same period.

I’m sad to say I’m confident most economics professors in the United States would get the three questions wrong. I’m also sad to say, I think it is no more possible to explain the US economy without knowing these facts than it is to produce a useful theory of the solar system assuming turtles all the way down.

And since most economics professors wouldn’t get it right, that’s what they’ve been teaching. I would venture to guess, in fact, that a student at, say U of Chicago or George Mason University (to use the flagships for two of the more popular “schools of thought”) is more likely to get these questions wrong after taking an economics course than before. And now, after a few decades, its now popular wisdom and the foundation of our economy. If you’ve been wondering what caused The Great Stagnation and the mess we’re in now, look no farther.

As always, if anyone wants my spreadsheets, drop me a line. I’m at my first name (mike) period my last name (kimel – one m only!!) at gmail.com.

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Markets and Merchants’ Guilds: Which is the Chicken? Which the Egg?

This post was provoked by a moment of frustrated pique, another in a series of ‘shakes cane at clouds’ moments as this classic New Deal Liberal is driven to craziness by otherwise sensible social liberals who still fetishize markets. And yes I am pointing fingers right at Erza K, Matt Y and Kevin D. But in this case directly at Kevin and his piece today that should raise hackles at the very sight of its title: A Conservative Medicare Plan Liberals Could Love Here is the core proposal:

What to do? Via Reihan Salam, Yuval Levin proposes a revised version of Ryan’s plan that’s based on a genuine conviction that market forces can work. Each year, Medicare would define a minimum benefit level, and then providers in each Medicare region (there are four) would bid for business:

The level of the premium-support payment in each region for that year would be set at, for instance, the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer in their area. Thus, in each region, there would be at least one option that would cost less than the Medicare benefit, and seniors choosing that option would get the difference back as cash in their pockets; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose.

….In such a system, the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula…. If market forces did drive costs down, as conservative health care experts expect, the reform would save the government an enormous amount of money….If market forces did not drive costs down, then we would have to find another way to address our entitlement costs. We would be back where we started, which is where Democrats want to end up anyway. Whether the reform succeeded or failed, seniors would have a guaranteed benefit and essentially no added financial risk.

Generally speaking, there’s no reason this idea should offend liberals.

Well as I said over there maybe just one tiny reason. I call it “the whole effing history of market relations” reason. Rant continues below.

My question is inherent in the post title. Historically did free markets precede artificial market barriers and price fixing? And in the European context the answer is clearly no. As the historical record dawns in the West long range trade is firmly in the hand of the Phoenicians and their colony in North Africa Carthage. Firmly because enforced by swords and fighting ships. Which in turn means harnessing state military power to enforce market barriers. And this model never changed over the three plus millennia to follow. Whether you take the Athenian Confederacy, the Roman Empire, medieval merchants guilds, the English Staple, the Hanseatic League, the East India Company in each case you have a cartel backed by or buying off state power to control entry to markets. And with enforced market barriers you have price fixing in more or less rigid form, competition on price always bounded.

Which doesn’t mean no competition at all, there will almost always be some level of internal price variation as well as external competition from smugglers and itinerent travelling merchants but the former were often treated as simple criminals to be punished by state power while the latter mostly relegated to openly marginalized groups, in Europe historically the Jews, the Roma/Gypsies, the Irish Travellers alternately grudgingly tolerated for specialized skils like tinkering or money lending or brutally suppressed, but never or very rarely simply accepted within the literal or figurative walls that protected major commodity markets.

Real economic historians please chime in with counter-examples, clarification, or simple vilification, AB is a blog, we exist to start conversations. But in the case highlighted by Drum the gaping flaw is obvious. All it takes to game this system is for the cartel of health insurers to decide who is going to be the number two in any given market, who is tasked to undercut him marginally and so be the ‘low-cost’ provider, while anyone else is free to adopt or try to leverage off the price level set by no 2. Which price doesn’t have to have any particular relation to cost of providing services or marginal productivity or any of the other fetishes of free-market absolutists. Instead any time you have a commodity based production commodity whether that be rice, wool, or simple labor supply, where withholding that commodity is not an option in real terms, not when the producers are at or near subsistence levels, the price of wholesale and retail is set by the market controllers. Because in the case of these basic commodities neither supply nor demand is infinitely or even partially elastic, the farmer needs to sell his crop, the village or urban worker needs to eat, and in between is the merchant’s guild backed by state power as necessary. And certainly health care for seniors falls into this must have category, and doubly so if the actual funding is mostly external to the end consumer.

It has always been such since Egyptian faience glass was exchanged for Baltic amber or either for tin from the Pretannic Isles (the Greek name for Britain). Historically there have always been middle men and in all cases in which I am familiar those middlemen had some sort of internal coordination on both pricing and in keeping competing cartels out of their market by all means necessary.

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The Effect of Individual Income Tax Rates on the Economy, Part 7: 1988 – 2010

by Mike Kimel

[UPDATE: Graphic title corrected below. h/t Eric Whitaker]

This post is the seventh in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fourthh looked at 1950 – 1968, and the fifth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, it was also covered again in the sixth post, which looked at the period from 1981 to 1993. This post will look at the period from 1988 to the present.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not remotely what people believe, but that’s what it is.

In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.

Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 – 1988 and the 1981-1993 posts. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That’s it. In fact, its worse than that… during the Reagan Bush 1 years, aside from that one good year, growth tended to shrink as tax rates were slashed.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

So here’s what the period from 1988 to the present looks like [update: Graphic Title Corrected; h/t Eric Whitaker)

Once again, the data fails to show anything resembling the old “lower taxes = faster growth” story. In fact, once again, it kind of looks like things go the other way. The two biggest dips in the graph occur when tax rates are at low points (28% and 35%). The highest tax rates also coincide with the fastest overall growth. But no doubt next week’s post looking at the next period will be the one that finally shows what everyone believes is there. Oh wait, we’ve run out of years.

Now, I’m sure someone will bring up the fact that there was a tech boom and the internet in the late 1990s. And no doubt there was some of that. But that doesn’t explain why only once did the graphs appear to show that cutting tax rates correlates with faster economic growth, and that one time occurred in the middle of WW2 during what was essentially a command economy when tax rates were above 90%. Talk about a special case. Conversely, most of the other graphs that we’ve seen in this series have not shown any relationship between tax rates and economic growth. And then there were a few, such as those showing the Reagan era, that seem to at least suggest that faster growth was more likely when tax rates were higher. None of this matches what we hear in the liberal (ha ha) media. None of this matches what I see in econ textbooks. It doesn’t match what I read in economics journals. But anyone, and I mean anyone, can do these graphs. Not sure many people can replicate Barro.

Next post in the series… what it all means.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

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The Effect of Individual Income Tax Rates on the Economy, Part 3: WW2 and the Immediate Post-War Recovery

by Mike Kimel

This post is the third in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940. This one will look at the period from 1940 to 1950.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 [link fixed] failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. There were also a few other findings that might be surprising – the so-called Roaring 20s were a period in which the economy was often in recession. The New Deal era, on the other hand, coincided with some of the fastest economic growth rates this country has seen since reliable data has been kept. As we will see in this post, the period from 1940 to 1950, encompassing WW2 as well as the immediate post-war recovery, also is subject to a lot of popular misconceptions.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate.

The following graph shows the growth rate in real GDP from one year to the next (black line) and the top marginal tax rate (gray bars) for the period from 1940 to 1950.




Finally, in the fourth decade we looked at in this series so far, we see a graph that doesn’t contradict textbook economics: growth seems to slow down as tax rates rise, reaching its lowest point (on the graph) when tax rates peaked. Then, after tax rates begin to fall, growth picks up again. So why do we see this negative correlation between tax rates and subsequent growth rates during the 1940 to 1950 period when we saw the opposite in the previous periods?

Well, as I’ve pointed out many times in the past, there is a quadratic relationship between tax rates and subsequent growth rates (kind of like the Laffer curve, but with real GDP growth taking the place of tax collections), and the fastest growth tends to occur when the top marginal rate is somewhere around 65%. (At this juncture I have to point out things can be true whether we like them or not. If you’re looking for a micro-foundations reason why raising tax rates can create faster economic growth, try this.)

In any case, tax rates in 1940 were at 79%, and they reached a high of 94% in 1944 and 1945. Clearly, at 79% the top marginal tax rates were already above optimum, and raising them simply moved them even farther away from the optimum growth rate. Conversely, cutting tax rates down to the low 80% following the end of WW2 moved tax rates closer to optimum.

But growth does not live by tax rates alone and the graph above hints at a few other misconceptions. Let’s start with a big one shared by folks on the left and the right, namely that World War 2 led to faster economic growth. In fact, many folks go so far as to say the economy suffered very slow growth until the outbreak of WW2, which as we saw in the last post in the series, is a comical claim. The graph below shows growth rates from 1938 to 1944. (Remember – for our purposes, growth is from t to t+1… thus, growth in 1938 is the percentage change between the 1938 real GDP and the 1939 real GDP.) As with Figure 2 in the previous post, the best ever year of the Reagan administration is also included for comparison purposes.




Notice… growth was already fairly quick from 1938 to 1939, and from 1939 to 1940… and then it really jumped from 1940 to 1941. Pearl Harbor was December 7, 1941, so most of that latter jump came before the American entry into the war. Now, one might say that somewhere around 1938 was the beginning of US involvement in WW2, what with Liberty Ships and the Arsenal of Democracy and all. Put another way, that big jump in growth came before the US was in the war, but as an administration whose policies had already generated several years of very rapid growth since 1933 took an increasing role in the economy. Apparently the economic policies followed were good enough to overcome even tax rates that were significantly above optimum.

Growth peaked between 1941 and 1942 and then began to shrink. In part, as we saw, that was because tax rates got too far above optimum. In part, on the other hand, it is because too much of the country’s labor pool was shipped abroad to fight in the war. But regardless… if the war had been a catalyst for jumpstarting the economy, the peak would not have occurred when it did… and growth would not have started accelerating so many years before the country’s entry into the war..

There’s one more myth that is worth tackling. That myth is that there was some sort of stupendous economic boom following WW2. And it only makes sense that there would be such a boom – the GIs came home, tax rates were cut in 1946 and again in 1948, government spending dropped, and rationing and price controls went by the wayside. And as Figure 1 shows, real GDP had a post-war nadir (I always wanted to use that word!!!) in 1947, and recovered after that. But it is important to put that recovery into context.

The graph below shows the rate of growth from 1947 (the bottom) to 1950 – the post-war miracle, as it were – and it compares it to the rate of growth from 1933 (the bottom of the Great Depression) to 1936, the heart of the New Deal.




As Figure 3 shows, there really is no comparison between the two recoveries. Whereas during the post war recovery, the economy grew almost 13% over three years following the bottom, it grew almost three times faster following the bottom in 1933. And from the previous post, we saw what happened during the rest of the 1930s. We’ll see what followed the post-War recovery in the next post on this series.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel at gmail period com.

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Fleem, Super Fleem, and Fleem Plus

by Mike Kimel

Assume a world similar to ours, but with a major difference. At some point in the 1920s, an inventor came up with a product called Fleem. Fleem has interesting properties, and when applied liberally in a house, gives even the meanest hovel a more homey feel. A healthy market for Fleem develops in the 1920s. John D. Rockefeller, having attributed the presence of Fleem to ridding his granddaughter of impure thoughts, instructs his son to create an organization (“Standard Fleem”) dedicated to making Fleem more widely available.



Over time, the process of Fleem manufacture improved, and prices came down. A number of companies that jump into the market, and by 1968 the Rockefeller Foundation IPOs Standard Fleem on the NYSE. To demonstrate Standard Fleem’s independence, the Rockefeller Foundation retains precise zero percent of the ownership of the newly public Standard Fleem Inc. The Rockefeller Foundation does, however, continue funding research on Fleem, just as it does on various crops, diseases and techniques for ridding young ladies of impure thoughts.

The market for Fleem is healthy and robust. Eventually a new form of Fleem is invented by a reclusive manufacturer of wooden airplanes in Las Vegas. The new product is christened with the remarkably original name of Super Fleem. A few years later, the Rockefeller Foundation develops a new variant of Fleem additive it calls Fleem Plus. Some homeowners prefer it, some don’t. You can’t argue with taste. The Rockefeller Foundation licenses Fleem Plus to any manufacturer that wants it, subject to one caveat: any product with Fleem Plus in it must be sold at favorable rates to minority groups that historically were kept from buying Fleem products.

By this time, the market has segmented. But for our purposes, there are four products out there: Original Fleem, Original Fleem with the Fleem Plus Additive, Super Fleem, and Super Fleem with the Fleem Plus Additive. Eventually it is discovered that prolonged exposure to Super Fleem kills adults whose favorite color is red. It also kills ferrets.

Unfortunately, without precise records, it is hard to tell whether a building had Super Fleem applied to it. The housing market collapses, taking much of the economy with it. Some years later, someone crunches the numbers and finds that most Super Fleem was sold without the Fleem Plus additive.

Questions:

1. Discuss the culpability of the Rockefeller Foundation for the economic mess in this alternate world.

2. Discuss the culpability of the Rockefeller Foundation for the economic mess in this alternate world, bearing in mind that in our world Fannie Mae was IPO’d in 1968.

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No One Else Is Happy with BarryO and Some Random Notes

Economists for Obama suddenly showed up in my RSS reader again. It’s not a pretty sight:

I suppose I might change my mind, but after watching the President give in to the Boehner-McConnell blackmail axis, I don’t imagine I’ll be spending much of my time advocating his re-election. Assuming he’s the Democratic nominee, which I do, I’ll vote for Obama, because the alternative will still–somehow–be worse. But I really can’t see how, in good conscience, I could defend the economic policies of a guy who has signed on to fiscal contraction in the midst of a major downturn. And that’s leaving aside the President’s apparent lack of understanding of the importance of bargaining from strength. So much for all that poker expertise he’s supposed to have.

What a shame.


See also The Rude Pundit, who is gracious:

I got into this relationship without any illusions about who you were. I never listened when others told me that you were perfect. I never listened when some told me you weren’t worth my time. I got together with you because I believed in us. You and me. Somewhere along the way, you stopped caring. Somewhere along the line, you started believing in others more than you believed in me.

I loved you as a smart, principled man. I worked at this relationship. Even when we fought, I still sought out the good in you. Now, finally, after watching you have affair after affair, saying each time that it was just a one-time thing, I have to allow myself to feel bitter and angry and more than a little foolish. And I have to do that by myself.

I’m sure many of my friends will be upset. “What are you going to do now?” they’ll say. “You’re not going to date Mitt or Michele, are you?” What that implies is that I should settle, that I should compromise myself and my dreams just to keep us together. No one deserves that kind of power. And they never considered a third option between staying with you and being with someone else. They never considered that I could just be alone.

So this is a separation, and I’m sure you’ll be dating again quickly. But I need a break. I need to remember why I loved you. I need to miss you. I need to see if I miss you. Sure, sure, you’ll say, I’m being a drama queen, that nothing has changed, that I don’t live in the real world, that everything you’ve done has been for me, that I just don’t understand what it’s like to live with the pressure that you have. No, but I have to live with the results of what you do. And after you’re done, in 2013 or 2017, you’ll still be a rich moderate conservative and I’ll still be a middle-class liberal trying his best to clean up all the messes.

I’m gonna pack up my stuff and head out now. I wish you well, truly, for everyone’s sake. But I think if there’s anything you can take away from this, it’s simple:

It’s not me. It’s you.

When even Larry Summers gives up on you, it’s time to pack your bags. Which is undoubtedly what several of the more politically-aware appointees started doing around twenty-four hours ago, making getting anything done all the more improbable.

Three notes:

  1. It’s not a repeat of 1937. It’s closer to 1882. Economists who know their history, speak up.
  2. Quick compilation of expected drag from the “deficit agreement”:
    1. J.P. Morgan: “we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012”
    2. Tim Duy’s “simple model”: “0.6 and 0.7 percent, respectively, for the final two quarters of [2011],” and getting worse in 2012.
    3. Macroadvisers (h/t Brad DeLong): “a modest 0.1 percentage point of GDP growth in FY 2012,” with the damage to be done by the Gang of 12 “No Revenooers” to cause death and destruction as Obama prepares to leave for Bachmann-Perry Overdrive (the MA graphic shows about 1/8th of 1%).
    4. Ryan Avent (on his Twitter feed yesterday): “Assuming no extension of the payroll tax cut or UI benefits, the US is looking at a 2% of GDP effective fiscal tightening over the next year.” (NOTE: Later details appear to be that this is basically 2.6% decline from tightening, 0.5% cyclical gain, netting to around 2%. Reference also made to JPMC survey above.)

    type=”a”>

    I can’t speak for anyone else, but I know which is the outlier in that set.

    And, finally:

  3. Dear Greg Mankiw (h/t Mark Thoma):

    If you claim the Federal Reserve Board is an independent entity, why do you argue that “a higher inflation target is a political nonstarter” (even while conceding that “economists have argued, with some logic, that the employment picture would be brighter if the Fed raised its target for inflation above 2 percent”)?

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Beating The New Republic by Seven Days, or Does Jonathan Cohn Read AB?

Yes, it’s another “AB was right” post. Detractors of this blog in general and me in particular could stop reading now.

But they shouldn’t. Anyone who thought through the economics could have pointed out what I did on the 17th:

From [Republican Congressman John] Boehner’s site:

At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

This should be intuitive. If the company is paying $1,000 a month for my family’s health care along with my $800 a month, it can raise my paycheck by $1,000 a month—employee compensation is employee compensation—and cut back on its health care administration. If I’m not a health-care administrator, it’s win-win.

Any economist worth her salt should know that lower costs of employment increase overall employment (assuming there is not a demand-side problem).

If the McKinsey “study” were accurate—again, not the way to bet—we should expect overall employment to increase….

The follow-on effects in that universe: more people joining the HIEs than expected, improvements in the measurement of “real” wage growth, greater transparency in the current health-insurance system, and arguably a larger contingency of workers demanding something closer to a single-payer solution, all improve efficiency and provide opportunity for economic expansion.

Or what Jonathan Cohn wrote for the Kaiser Health Network and The New Republic a week later:

But here’s the irony: Most people like the insurance they get from their employers, which is why you hear politicians from both parties constantly promising to keep that coverage in place. In the long run, though, workplace-based insurance is probably not an arrangement worth preserving….

An ideal health care system would…liberate employers from the responsibility of administering health benefits for workers, allowing them to concentrate on other, more productive activities. Let the car companies make cars and the grocery stores sell groceries and the software firms design software. They don’t need to be running health insurance plans, too.

I’ve left out Cohn’s historically-illiterate paragraph about the groups of private health insurance, since he omits the main reason it developed: wage controls during wartime left employers looking for other ways to attract and keep workers.* At least he comes to the correct conclusion:

A single-payer system, with a combination of basic government insurance and private supplemental coverage, would be a much better alternative. So would a “competition” system that looks like what is currently in place in the Netherlands or Switzerland, or what Senator Ron Wyden, D-Ore., first proposed back in 2007. The Affordable Care Act could evolve into such a system, particularly if the new insurance exchanges work well and workers feel comfortable the insurance available there is as good as what they’d get from employers. But that transition would probably take a lot of time, no matter what corporate officials were telling the survey-takers at McKinsey.

It’s not just a lot of time. It’s a lot of opportunity cost and underutilized human capital. And we have enough of that already,** no?

Good to see the Mainstream catching up with AB.

*As an alternative history, consider that, if that industry hadn’t begun to develop during the War After the War to End All Wars, the U.S. might have followed the same path as the United Kingdom and founded the National Health Service, instead of leaving the country, almost sixty-five years later, trying to pretend that Barack Obama is Tommy Douglas.

**Yes, I would have found a way to link to this piece just for the title. When Brad DeLong is starting to entitle his pieces as if he were Lee Papa (or at least me; see the following link), the Sensible Centrists are once again signaling that their imminent move into the Activist camp.

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Time to Change Those Tags? or Economists Catching Up, Round Two

Brad DeLong, not generally a Leading Indicator in such matters, follows Mark Thoma yesterday in looking into the abyss and seeing the outline of a train around the “light”:

Henceforth, I will call the current unpleasantness not “The Great Recession,” but rather “The Little Depression.”

This still strikes me as optimism, but I’m stil on what do you call 1873-1896 (much more similar to the current situation) when “The Great Depression” only lasted about 17 years?

(Aside: Round One of Economists Catching Up was here.)

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Post WW2 Private Investment v. New Deal Private Investment

by Mike Kimel

Post WW2 Private Investment v. New Deal Private Investment
Cross posted at the Presimetrics blog.

I had a post the other day (which appeared at the Presimetrics blog and Angry Bear, and which was followed up by my fellow Angry Bear, Spencer, here) looking at a paper by David R. Henderson about the supposed post-World War 2 economic boom.

I noted that his view fit into a libertarian/conservative story line, but required not only assuming the GDP (or GNP) data from WW2 is wrong, but also that the data at least through the early ’50s is wrong too, despite the fact that the data fits other known facts pretty well. By contrast, Henderson’s story conflicts with known facts in a number of places.

However, there is one point – another libertarian/conservative myth which comes up in the paper that I’d like to focus on in this post. Henderson tells us:

Why did the economy do much better after the war than at the beginning? We can’t know for sure, but the most likely explanation is the change in administration from Roosevelt, who championed central government planning of the economy, to Truman, who was much less inclined to support government control.

Also see Econospeak’s Prof. Rosser on 1920-21 recession

See,

Before the United States entered into World War II, the New Dealers—the faction of Franklin Roosevelt’s administration that was most hostile to economic freedom—had significant power. During the war, they were largely displaced by more pragmatic people who were not hostile to free markets (thus the quote from Henry Stimson at the beginning of this section).

Moving on…

Roosevelt’s death cleared the way for President Harry Truman. Although he was a New Dealer, Truman had no love for “the long-haired boys” who were associated with the most anti-market parts of the New Deal—people such as Ben Cohen, William O. Douglas, trust-buster Thurman Arnold, price controller Leon Henderson, and Felix Frankfurter. In 1945 and 1946, Truman got rid of a number of New Dealers, including two of the most prominent ones: former vice president Henry Wallace and Harold Ickes.28

Higgs points out that the polling data bear out the perception of a regime change under Truman. As a result of the change, writes Higgs, “Investors were then much more willing to hazard their private property than they had been before the war, as both survey data and financial market data confirm.”29

And invest they did. As table 2 shows, gross private domestic investment in real 1964 dollars was $44.4 billion in 1941. For all the war years it was half or less of that 1941 level. In 1946, it shot up to $51.7 billion, grew slightly to $51.8 billion in 1947, and then grew to $60.6 billion in 1948.

So essentially, Henderson’s belief is that there was a boom after WW2 and that it was caused because greater economic freedom encouraged more private investment. We’ve already dealt with the supposed boom, but what about private investment? Was private investment really booming in the post-WW2 era relative to the pre-WW2 era? Simply put, no, as is evident from the following graph, constructed using data from NIPA table 1.1.6:

Figure 1

From the graph, its pretty obvious that the New Deal easily beat Henderson’s post-WW2 boom when it comes to encouraging private investment. The explanation for why is obvious to anyone who has not bought into libertarian or conservative beliefs about how the economy works.

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