Tuesday, 28 August 2012
Dual Mandate
There is a lot I disagree with in Senator Corker's FT op-ed calling for an elimination of the dual mandate, but I found the part where he valorizes the Bank of England and ECB to be the most wrongheaded. The Eurozone and Great Britain are both doing terribly economically. In both cases this is largely due to their inadequate monetary policies. If we want to look to other central bank's as a way to improve our own we should be looking to those in countries that have for the most part avoided the worst of the recession--Canada, Sweden, and Israel.
Monday, 13 August 2012
Ryan is a fine VP pick
There has been some excitement from Democrats about the Ryan pick. Some feel like his budget will sink the Romney campaign because the medicare cuts are unpopular, etc. I don't think this is the case for two reasons. First, the VP pick doesn't really matter. Second, Ryan is above all a good politician. Despite voting for all the Bush spending he has been able to reposition himself as a small government conservative with conviction. I have no doubt that he will be able to explain to voters that his budget plan may have been too aggressive but he wanted to get people talking and thinking about serious entitlement reform. On 60 minutes last night him and Romney got a lot of softballs but Ryan showed that he has a real knack for answering questions slightly different from those posed to him by interviewers with a lot of detail and specifics, making it seem like he answered the question posed. He also talks fast so he seems really smart (the Sorkin effect). I might be wrong but I think its a fine pick by Romney.
Loyalty Cards
Kevin Drum has a new post as part of a back and forth with Matt Yglesias and a few other economist types about price discrimination and loyalty cards.
Drum began by making the point that those of us who are savvy enough to be getting a better price are doing so at the expense of those who are getting a worse price. Yglesias counters by arguing that everyone pays the normal price and loyalty card owners trade off the use of their consumption information for a lower price. Furthermore, any non-loyalty card price gouging is the result of a supermarket having a local monopoly--something that occurs even without loyalty cards.
I tend to side with Yglesias but I think Drum needs to focus his argument more. He doesn't really seem opposed to price discrimination in the abstract, rather he doesn't like loyalty cards specifically. His arguments seem to be 1) they don't help poor people--as the poor (and elderly) aren't necessarily the savvy consumers who take advantage of cloyalty cards; and 2) poor people can't afford to pass up loyalty card prices--so they are forced to give up personal information.
These two arguments seem somewhat contradictory but I think the bigger point is that Drum needs to make the case as to why loyalty cards should be eliminated as part of public policy. As a society we don't favor economic efficiency over all else (prostitution is illegal) and we have various consumer protection laws. If Drum made the case that these loyalty cards really are either 1) shifting costs from wealthy consumers to poorer ones; or 2) coercing people into revealing information that corporations were using in an insidious manner, then I think Yglesias and co. would agree that they should be eliminated. But he needs to actually make that case because there doesn't seem to be anything inherently wrong with the loyalty card price discrimination scheme.
Drum began by making the point that those of us who are savvy enough to be getting a better price are doing so at the expense of those who are getting a worse price. Yglesias counters by arguing that everyone pays the normal price and loyalty card owners trade off the use of their consumption information for a lower price. Furthermore, any non-loyalty card price gouging is the result of a supermarket having a local monopoly--something that occurs even without loyalty cards.
I tend to side with Yglesias but I think Drum needs to focus his argument more. He doesn't really seem opposed to price discrimination in the abstract, rather he doesn't like loyalty cards specifically. His arguments seem to be 1) they don't help poor people--as the poor (and elderly) aren't necessarily the savvy consumers who take advantage of cloyalty cards; and 2) poor people can't afford to pass up loyalty card prices--so they are forced to give up personal information.
These two arguments seem somewhat contradictory but I think the bigger point is that Drum needs to make the case as to why loyalty cards should be eliminated as part of public policy. As a society we don't favor economic efficiency over all else (prostitution is illegal) and we have various consumer protection laws. If Drum made the case that these loyalty cards really are either 1) shifting costs from wealthy consumers to poorer ones; or 2) coercing people into revealing information that corporations were using in an insidious manner, then I think Yglesias and co. would agree that they should be eliminated. But he needs to actually make that case because there doesn't seem to be anything inherently wrong with the loyalty card price discrimination scheme.
Sunday, 12 August 2012
In Defense of Multi-Decade budget planning horizons
Earlier today Matt Yglesias tweeted this:
"Ryan specifics aside, the DC wonk fetish for multi-decade budget planning horizons is inherently ridiculous."
This is something he has discussed before. Broadly his point is that if we enacted the Ryan budget there is nothing preventing politicians 10 years from now from restoring medicare commitments to what they are currently.
This is true, but I think it misses a larger issue that there is a strong status quo bias in the American political system, and large changes usually persist for many decades. If the Bush tax cuts werent expiring it is hard to imagine Obama making the case to raise tax levels for those making over 250k. Medicare and Medicaid persist. So does social security. Government makes commitments, citizens plan around those commitments, those commitments become popular. This creates a path dependency that makes large changes in government commitments semi-permanent.
I do think that large cuts to medicare now would be important in 30 years. And for Ryan, reducing medicare funding would change the 30 year fiscal outlook.
"Ryan specifics aside, the DC wonk fetish for multi-decade budget planning horizons is inherently ridiculous."
This is something he has discussed before. Broadly his point is that if we enacted the Ryan budget there is nothing preventing politicians 10 years from now from restoring medicare commitments to what they are currently.
This is true, but I think it misses a larger issue that there is a strong status quo bias in the American political system, and large changes usually persist for many decades. If the Bush tax cuts werent expiring it is hard to imagine Obama making the case to raise tax levels for those making over 250k. Medicare and Medicaid persist. So does social security. Government makes commitments, citizens plan around those commitments, those commitments become popular. This creates a path dependency that makes large changes in government commitments semi-permanent.
I do think that large cuts to medicare now would be important in 30 years. And for Ryan, reducing medicare funding would change the 30 year fiscal outlook.
Thursday, 9 August 2012
A Simplified Tax Code Isn't a Good Thing
A certain set of political writers and politicians advocate for "tax simplification". The idea is that by eliminating tax exemptions we can reduce overall rates and this would be a good thing. This is often held up as the type of bipartisan reform that would happen if congress could get it's act together.
The problem is that nobody really believes the government should be neutral towards all activities. As Matt K. Lewis points out the tax code favors activities like having children and home ownership. The tax code also discourages activities like consuming tobacco and cigarettes. In order to raise revenue, federal, state, and local governments need to enact taxes. An ideal tax code would be one that focuses these taxes on activities with negatives externalities and reduces the tax burden on activities with positive externalities. This would not be a simple tax code.
The real arguments over taxes is whether and how much the government should redistribute wealth away from the wealthy towards the poor and which activities have negative (carbon? alcohol? gasoline consumption?) and positive (having children? building a church? charitable giving? building affordable housing? "green" technology development?) externalities. These are political arguments that reflect real disagreements between the right and the left.
There are definitely issues with the corporate tax code that reflect political economy problems and should be resolved through simplification but in general a simplified tax code isn't necessarily a good thing. And there are very few tax reforms that can be done in a nonpartisan way.
The problem is that nobody really believes the government should be neutral towards all activities. As Matt K. Lewis points out the tax code favors activities like having children and home ownership. The tax code also discourages activities like consuming tobacco and cigarettes. In order to raise revenue, federal, state, and local governments need to enact taxes. An ideal tax code would be one that focuses these taxes on activities with negatives externalities and reduces the tax burden on activities with positive externalities. This would not be a simple tax code.
The real arguments over taxes is whether and how much the government should redistribute wealth away from the wealthy towards the poor and which activities have negative (carbon? alcohol? gasoline consumption?) and positive (having children? building a church? charitable giving? building affordable housing? "green" technology development?) externalities. These are political arguments that reflect real disagreements between the right and the left.
There are definitely issues with the corporate tax code that reflect political economy problems and should be resolved through simplification but in general a simplified tax code isn't necessarily a good thing. And there are very few tax reforms that can be done in a nonpartisan way.
Wednesday, 1 August 2012
Towards a theory of FOMC inaction
As most people know Ben Bernanke was a major critic of the timidity of the Bank of Japan. That's why its been strange to see the FOMC unwilling to take further accommodating action despite this economic forecast:
Every single FOMC statement so far in 2012 has had a single dissenter in Richmond Fed Chair Jeffrey Lacker, who usually didn't support the commitment to near-zero rates through 2014.
In 2011, all FOMC statements were unanimous, except for 3 where Chicago Fed Chair Charles Evans called for additional accommodation, and 2 meetings where 3 of the regional heads (Fisher, Plosser, and Kocherlakota) dissented.
In 2010, Hoenig was the sole dissenter on every statement calling for tighter policy.
In 2009, the decisions were unanimous except for a single dissent by Lacker.
In 2008, you see similar patterns including an absurd call by Fisher to raise rates on August 5.
In the last few years we see zero dissents from members of the board of governors, very few dissents generally, and almost all of them in the direction of tighter policy.
The FOMC's website describes their decision making procedure as: "the Committee must reach a consensus regarding the appropriate course for policy" (Note: the actual rules of procedure don't seem to require this)
I will try to dig through some of the minutes of old meetings to investigate this further, but generally my thesis is that; 1) the FOMC has adopted an informal rule that decisions will only be made through quasi-consensus; 2) none of the members of the board of governors is willing to dissent; and 3) by stressing consensus the FOMC is unable and unwilling to take bolder action which would necessitate revealing broader disagreement within the FOMC.
The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.I think the reason for this is the quasi-unanimous nature of Fed policy making. For a number of reasons (some probably legitimate) the FOMC seems to feel like it needs to act under appearance of near unanimity.
Every single FOMC statement so far in 2012 has had a single dissenter in Richmond Fed Chair Jeffrey Lacker, who usually didn't support the commitment to near-zero rates through 2014.
In 2011, all FOMC statements were unanimous, except for 3 where Chicago Fed Chair Charles Evans called for additional accommodation, and 2 meetings where 3 of the regional heads (Fisher, Plosser, and Kocherlakota) dissented.
In 2010, Hoenig was the sole dissenter on every statement calling for tighter policy.
In 2009, the decisions were unanimous except for a single dissent by Lacker.
In 2008, you see similar patterns including an absurd call by Fisher to raise rates on August 5.
In the last few years we see zero dissents from members of the board of governors, very few dissents generally, and almost all of them in the direction of tighter policy.
The FOMC's website describes their decision making procedure as: "the Committee must reach a consensus regarding the appropriate course for policy" (Note: the actual rules of procedure don't seem to require this)
I will try to dig through some of the minutes of old meetings to investigate this further, but generally my thesis is that; 1) the FOMC has adopted an informal rule that decisions will only be made through quasi-consensus; 2) none of the members of the board of governors is willing to dissent; and 3) by stressing consensus the FOMC is unable and unwilling to take bolder action which would necessitate revealing broader disagreement within the FOMC.
Base Broadening
The Tax Policy Center released a great study today (pdf) on the distributional effects of a generic, Romney/Ryan style, revenue neutral, base broadening plan. This type of plan cuts income taxes for those in the highest tax brackets and eliminates many tax deductions that favor low and middle income households. As you can see below this type of base broadening will reduce after tax income for Americans making less than 200,000 a year (around 95% of the population).
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