Showing posts with label fiscal policy. Show all posts
Showing posts with label fiscal policy. Show all posts

Tuesday, February 15, 2022

Don't Confuse Poverty For Inflation

Just when they said it was dead and gone, inflation is back loud and clear. The latest reading of the CPI for January 2022 is 7.52%! We haven't seen these levels since the early 80s, or is it since the mid 70s thinking that this is the upswing with more to come? That is a scary thought as inflation didn't peak until 1980 at 14.6%. 


While I believe the Fed has the resolve and know how to tame inflation, that indeed does remain to be seen. However, that isn't the point of this post. 

What is on my mind is a mistake I hear being made often as an apology/excuse for Biden. Since Biden is currently the President, it is the left who is offering this excuse. Had Trump won, I would fully expect the right to be making the same mistake. 

The mistake is thinking Biden (like Trump before him only more so with Biden) does not bear some blame for the inflation numbers we see. The short version is: "It's not Biden's fault; it's the pandemic's." 

Had the apologist said instead, "It's not Biden's fault; it's the Fed's," I would have cut them some more slack. The Fed is ultimately the reason we do or do not have true inflation (a sustained increase in the overall price level relative to the medium of account, USD). 

The pandemic and the policy responses to it have generated enormous supply and demand disruptions. The magnitudes here quite certainly matter. But the price affect from all of that is not inflation. It is a change in relative prices--dramatic as they are, they cannot result in an inflationary outcome without the Fed as an accomplice. Relative prices are the market adjusting to reality finding new price and quantity equilibria. This very necessary process is why price controls don't work causing painful problems themselves.

Here is the thinking that leads the apologist astray: 
  • The pandemic messed everything up where we couldn't work as much, killing production, etc. (negative supply shock).
  • It is no surprise the shelves are bear. (scarcity at current price levels)
  • With fewer things to buy and all the money still out there including all the government support, prices had to go up--same/more dollars chasing fewer goods and services . . . I thought you understood economics, Winkler? 
One problem with that story is that it neglects half of the equation--income. When we produce less, we have less income. We are poorer than before (the economy's output and perhaps its potential output is now materially lower). Understanding that is a glimpse into how a bad event like a pandemic cannot by itself cause inflation--another problem with that story. Inflation comes if the monetary authority, the Fed in our case, fails to properly adjust monetary policy adjusting it downward. 

Negative supply shocks like pandemics increase poverty--or reduce wealth depending on your framing. They make us poorer. Poorer might look like inflation, but it isn't. Consider this:

 

In this chart the farther to the right and/or the lower on the chart a country is, the wealthier it is in terms of how much it works (average annual working hours on the y-axis) for the income it generates (GDP per person on the x-axis log scale). Notice this data is for 2017. For example, Brazil has a per capita GDP of about $14,500 with the average worker working about 1,710 hours per year. The United States enjoys a per capita GDP of about $60,100 with very similar average worker hours, about 1,760. People in America are a lot more productive than people in Brazil.*

Along the vertical we can make another comparison between Hong Kong (GDP = $59,800 & Hours = 2,190) and the U.S. (GDP = $60,100 & Hours = 1,760). Again the U.S. has higher productivity generating about the same income as HK for considerably fewer hours worked. 

Ultimately time is the common currency all humans deal in as it is the one truly binding constraint. Looked at this way we can consider what a really bad supply shock might look like for the U.S. Imagine our total production went from $60,100 all the way down to Brazil's level but hours worked stayed the same. Suddenly the cost of our income (cost being hours worked) is much, much higher. Alternatively, if we now had to work as much as Hong Kongers do for the same income, the cost of our income is again much higher. We are working the same for less income in the first case and working a lot more for the same income in the second. In terms of hours worked is this inflation? No, it is an increase in poverty/massive reduction in wealth. 

Think about it this way: If you suddenly were relocated from the U.S. to Brazil doing the same job, you'd immediately notice that your pay was lower. If you were purely on the average, you'd notice that working your regular 1,700 hours per year only allowed you to buy about a quarter of the goods and services you enjoyed in the U.S. ($14,500/$60,100). You might say, "Wow! Things sure are expensive in Brazil." And you'd be right. But if you then concluded, "They must have had a crazy amount of inflation," you'd be quite wrong obviously. You personally experienced what looks like inflation to you but is really just a negative wealth effect due to the relocation.

People instinctively but mistakenly think bad events will cause inflation by assuming their incomes will remain the same while there will be fewer goods available. But for the entire economy incomes must go down if production goes down since they are the same number. 

So what did Biden (and Trump and Congress) do? Biden trumped Trump by helping Congress to spend a LOT OF MONEY.

Source

The reason spending during Biden's term has been so problematic is that we were largely exiting the pandemic at that time. You don't have to become an adherent to or expert on the fiscal theory of the price level to understand the issue. These greater and greater levels of government spending put more and more pressure on the Fed to constrain monetary policy so that the excess spending did not induce inflationary effects. So far the Fed has not been able to fully offset that spending.

Is the Fed to blame? Yes. Was its job made much harder by what the fiscal authorities (Congress and the President) did? Also, yes. Are there other knock-on effects from the spending and associated government programs the pandemic gave cover to? You bet, and they are likely worse than inflation [please, God, don't let the Fed now say "hold my beer".]


*There is a subtle pro immigration word choice I made here. Notice I didn't say "Americans" or "Brazilians". It is not the people so much as it is the economy they are working in. Relocate those same Brazilians to the United States, and their productivity would magnificently rise as if by magic even though it would for a time still be below current American rates. 

Sunday, January 24, 2021

The Time of Biden

Now that all the attempts at election stealing are over I feel compelled to put down in writing some predictions about Biden's presidency. Call it political fatigue from the 400 years of the Trump Presidency, but it is hard for me to muster much energy to do this. Still, here goes . . .

Optimism:

There are two kinds of optimism in the case of Biden--relative and absolute. The relative is in regard to the Trump alternative and perhaps the Biden of politics past. The absolute is more genuine if not also more wishful. 

Trade - This one is quite positive even though it is strongly of the relative variety. Biden was never great on trade and many times poor. Still this has changed as he shifts in the political winds. He both wants/needs to be not Trump and the political base is different for Democrats today than it was when he first ran for president over three decades ago. See my Five Tribes theory for background, but Labor is not the Democratic lock that it was in the past. Just a reset to pre-2018 (actual policy) and pre-2016 (rhetoric) would be a great improvement. 

Immigration - There is a strong chance that Biden will be very good on immigration. The development of Democrats getting better on immigration has been building for some time having only accelerated under Trump. So in this case we have relative and absolute improvement opportunities. 

Drug Policy - My optimism is tempered here, but it is present in an absolute sense. At the very least we should get a more hands-off, non-escalating war on drugs policy. This is a BIG improvement from what we would have expected from a 1990s Biden. My baseline expectation is eventual of decriminalization/legalization of marijuana within the next few years.  

Presidential Prestige - I am optimistic that the tone and style of the office will now be back to a civilized place--very much a relative optimism. The office of the U.S. President should be occupied by a person easily described as a gentleman or lady. Trump never fit this description, and his final days were the icing on the top. Yes, I want that same office to be greatly diminished in terms of power and worship. My hope was Trump would deliver the diminishment without going Game of Thrones. Largely my fear of getting the reverse was realized. 

Pessimism:

Unlike the optimism analysis, the pessimism comes basically only in the absolute variety. It is also the areas I tend to be most confident, unfortunately. 

Judicial Appointments - This one is not as pessimistic as one might assume. I don't want judges from the right or the left--that is a silly concept. I want judges that think critically and consistently demonstrating good application of the Law. Certainly I expect Biden's typical nominee will be less desirable than was the typical Trump nominee from my perspective. However, the best judges are impartial and well reasoned, and those include very many Biden will nominate. 

Regulation - The Trump administration was flat out good on regulation compared to any recent president (probably including Reagan!). He didn't as much shrink, though, as he reduced or stopped the growth of the regulatory state. Biden will reverse this trend. There is one area where Trump was certainly bad and Biden will likely continue this just in a different flavor--industrial policy/meddling with individual firms and industries. 

Taxes - Many people are rightfully worried about this for mostly wrong reasons. They don't want their own tax rates to go up. Ignoring the fiscal hypocrisy of this given the spending policies these same people typically demand, it is not a major problem that individual income tax rates (especially at the high end) are likely to increase. What people should be worried about is corporate tax rates increasing and to a lesser degree capital gains rates increasing. These are both much more destructive forms of taxes as they are taxing the creation of resources rather than the use of resources. Additionally, the restoration of the SALT deduction and the reduction in the standard deduction are also bad potential outcomes of coming tax policy.

War - I am hopeful that this ends up being an area like others mentioned where Biden today is different than he has been over the last 40 years. Despite this hope, you'll notice in which category I have placed it. 

Woke Politics and Policies - Think of this item as the inverse of Trump's nationalism. The risks are similar including divisive policies and rhetoric as well as censorship and ostracization. 

Spending - Your first thought should be, "Pessimistic on spending? Have you seen 2020?" True, but in only that limited and aberrational case is the relative comparison optimistic for Biden. The ratchet works in one direction generally, and even the possibility of a republican midterm sweep doesn't leave me optimistic.

Presidential Power & Authority - Here is the other side of presidential prestige from above. Every president in the last 20+ years has looked at the prior administrations' advancement of executive orders and general authority and said simply, "Hold my beer". If we only had another branch of government designed to be the strongest branch and willing to hold presidents accountable and within the bounds of their legal authority . . . 

Overall: 

The Biden years will hopefully be a time of surprise at how good some things are, not so bad other things are, and tolerably bad the balance is. This is how I now view the Clinton presidency. All of it is quite relative of course. Hope aside, I am more optimistic than I would have expected being faced with a Biden administration. Still the pessimistic angles are acute and meaningful. 


P.S. What about COVID-19 and the pandemic? While I expect a lot of theater to emerge and a rewriting of some history in favor of the current winners, the substantive part of this large issue is basically settled. In this way it doesn't matter much who won this election. Most of the decisions to be made are in the same incapable hands of FDA and other government officials along with the capable hands of private firms, organizations, and individuals. And in many ways the die is cast. The trajectory of the virus is set--declining regardless of what comes next but with a trajectory that very much can change depending on policy and actions taken. This is true and basically the same under Biden or Trump and even without vaccines. Vaccines are just a wonderful accelerator of the progress against the virus, which very much means fewer people suffering and dying. 



Thursday, October 8, 2020

Tax Policy as Explained by DuckTales

 


It should be no surprise that in this presidential election we yet again hear nothing but nonsense regarding tax policy from those seeking office. Among the many principles being ignored are:

  • You cannot tax wealth more than once--if you can even tax it the one time given tax avoidance and evasion opportunities and incentives.
  • You cannot lower taxes and increase government spending--government spending is taxation (today through taxes or tomorrow through debt).
  • You cannot tax without discouraging that which you tax--there is no tax free lunch.
  • You cannot tax income--it may look like you are taxing income, but you are actually taxing consumption. On this point we have DuckTales and the hero Scrooge McDuck as the perfect illustration.
If you try to tax Scrooge McDuck, you will be unsuccessful. He is tax proof. You are ultimately taxing Huey, Dewey, and Louie, and they are not being taxed correctly in this scheme. You are taxing the wealth creator dissuading him from creating more wealth and at the same time not discouraging the wealth/resource destroyers.

Uncle Scrooge McDuck is the "wealthiest duck in the world". Hence, he is an obvious foil for those who despair at the thought of billionaires. But Scrooge McDuck should be considered a saint to those who truly wish the best for all the other ducks of the world. For he is the ultimate giver. 

He creates vast wealth through his many businesses, but he uses very little of it. In fact his number one entertainment is simply swimming through his money and treasure which he keeps in a giant money bin. So in exchange for creating wealth he takes basically only money (claims on resources) rather than resources himself. Outside of funding his adventures for more wealth, he lives a quite miserly life. Say what you will about that choice, it is consequentially a very good one for the rest of the ducks in his world. 

Who really pays taxes? 

Taxes are a method of the financing of government uses of resources. In order for a tax to be paid, it must be the case that someone, somewhere, sometime not use a resource so that government can use that resource. Therefore, the payer of a tax is ultimately the entity that must forego the use of a resource. It is decidedly not the creator of the resource, per se

Who should we want to pay taxes? What should we tax and why should we tax it? 

I always argue we should tax resource use rather than resource creation and do so as efficiently as possible. We should tax if the use of the taxed resource is better and necessarily done through government rather than private entities. If that seems like a high hurdle, it's because it is.

Attempts to tax Scrooge McDuck are bad faith and poor logic.

Monday, January 15, 2018

Trump - One Year In

About a year ago, I posted on Trump looking at what I saw as the reasons to be optimistic and pessimistic. Let's revisit that now that we have a year under our belt.

Overall, I think my predictions were good with some notable variance in a couple areas. Of course, I was vague enough to prevent too much inaccuracy (or accuracy) by design. Here are the areas that standout to me with a look back at my prior comments.

The Good

  • Taxes - this one was somewhat surprisingly good, blemishes and all. [remember with all of these we are grading on a curve] Much like Chance, Trump only gets credit for being there to sign the bill. 
  • Regulation - 1.25 steps forward with 1 step back is still progress. Congress and Trump completely failed to reform much less repeal the ACA (Obamacare). I have low and ebbing faith Dodd-Frank, et al. will be meaningfully changed. Still, there are success stories, and slowing the rate of growth is itself improvement
  • Judicial Appointments - I somehow missed mentioning this previously, and it would have been in the optimism bucket. This one has lived up to realistic (not full libertarian) hope. 
  • Lost Respect for the Sanctity of the Office - yes this is a feature--let the scales fall from your eyes, the emperors have never been well dressed. But . . .
The Bad
  • Presidential Power & Authority - we may be chipping away at the Cult of the Presidency, but I don't yet see the groundswell from the left or the center that I might hope for. They are much to tied up in the emotion of this particular president's actions and words.
  • Immigration - unlike in trade (below), Trump's actions have matched his rhetoric in this area. Here it looks to be an on-going real fight and will perhaps be the most lasting and impactful negative consequence of Trump.
  • Trade - as I mentioned, his administration is a lot of (bad) talk on this, but so far little action. Still, he has many opportunities to make good on his very bad desires.
  • War - I was not pessimistic enough on this. Drone attacks have increased under Trump as the list of places we are at war have grown. The U.S. government with the help of a complicit even if blissfully ignorant populace continues to be wrongfully aggressive. Include in this the surveillance state, but I am fairly certain this one is sadly nonpartisan. 
  • Drug Policy - yep, unfortunately I nailed this one.
The Ugly
  • Hatred, Nationalism, Bullying, etc. - I was not as pessimistic as I should have been in this general area. The downside of losing the always undue respect for the U.S. presidency is that it took this buffoon to get us there. He is at best sloppy and inconsiderate, at worst hateful and demagogic. If you need links on this topic to prove the point, you have been in a coma for 12+ months.
On balance there are reasons to claim "silver linings" and reasons to claim "not so fast".

PS. For a better analysis of the economic policy results of Trump's first year, read Scott Sumner's take

Sunday, January 14, 2018

The 2017 Tax Reform

There may not be another area of public policy where the distinction is greater between how non-economists (the general public, politicians, journalists, and practitioners in the area (in this case tax lawyers and accountants)) and economists evaluate policy than exists in tax policy. Who should you pay attention to? I will let the rest of this post hint at my answer.

Here is a sampling for how economists look at taxes centering on the most recently enacted changes to the U.S. Federal Tax Code. I've indicated the major takeaways for each and tried to keep this as low wonk as possible. Trust me; it could have been a lot deeper in the weeds.

Scott Sumner notes that there is more good reform in the recent changes than what probably was expected, by no means is it all progress, and that three natural experiments come out of the package. He also has a post discussing misconceptions in tax policy where most people don't understand that to tax someone you must reduce that person's consumption. If you don't reduce it, you haven't taxed that person--period. He also points out that distortions are always an important part of evaluating tax policy.

Steve Landsburg echos Scott's take and adds his own points including how the recent reform is genuine improvement and still far, far from the ideal.

John Cochrane is always worth quoting on tax policy. I'll limit myself to a few. First, here is how he sees the public role for economists discussing tax policy. Here is a long, but very rewarding, analysis of how to craft a good tax regime and what makes it "good". He calls out a fellow economist, former colleague and friend Austan Goolsbee, for not thinking like an economist. And he reminds us that the distributional effects of tax changes are never what the public and media expect.

Rawls' Veil of Ignorance is a useful philosophical approach in many cases and a good tool for guiding tax policy. How tax changes happen to affect you should not guide what changes you support. Humility is another quality tax reform should respect. The risks of unintended consequences are orders of magnitude higher in tax policy than in other aspects of political economy.

Friday, January 20, 2017

The Age of Trump

Tomorrow one third of the United States' government leadership will change hands from one who once promised hope and change to one who now promises the same but supposedly of a different variety.

The tension around this transition is particularly elevated. Not since Hoover-Roosevelt has a U.S. presidential interregnum been so ugly. How will the final moments play out? Will Obama be gracious or will he smugly toss the football? Will the White House be adorned with golden accents? Will a great wall emerge protecting us from things we'd like to buy and people we'd like to meet? How great shall our greatness be?

Below is a partial list of my areas of optimism and pessimism as yet another self-greatness seeking charlatan proceeds to chase away our ideals.

Before I begin, a quick look at the optimism/pessimism I predicted about one year ago when Trump was but a surprising front runner though still a dark horse.
Optimistic - Shows why we should lose (and should have lost a long time ago) our reverent awe for the U.S. Presidency; prevents major government action/intervention/meddling on any number of issues by being a circus act writ large (his administration's priorities will be prestige and showmanship rather than policy accomplishment); forces a meaningful debate and action on limiting executive power (a little bit in tension with the previous prediction as this one mitigates a Trump administration that is actually trying to do something).
Pessimistic - Engages in major international war actions (beyond the high amount the each of his opponents would do anyway); sets back trade freedom and immigration substantially; creates strong racial, ethnic, nationalistic, and gender divides.
Overall - I estimate the optimistic possibilities are more likely than the pessimistic possibilities. 
 Optimism:

  • Taxes - As with many of these, Trump himself is not really the source of optimism. Rather the Republican Congress is the new hope. Trump is just the chance that a good reform will be drafted with the expectation that he will sign it into law.
  • Regulation - He continues to talk strongly about reducing the monstrous regulatory burden our federal empire exerts. The areas of particular expectation are banking & finance (Dodd Frank) and health care/medicine/insurance (ACA/Obamacare), but also environmental; although I am less sanguine about the prospects there. 
  • Presidential Power & Authority - This one is borrowed my original. I believe the return of the left is long overdue in this area. Perhaps it will take this time... doubtful. The same can be said for the anti-war movement. Their 8-year hibernation is now over. Remy puts it well in the second verse. 
There is no doubt these are important areas; yet, so are those I put in the pessimistic camp.

Pessimism:
  • Trade - Astute readers will notice how many of these in the pessimism category are related. Is his rhetoric enough to satiate the unintentional, populist desire to be poorer? Our trade deficit/capital account surplus is not some phantom menace plaguing our economic well being. Is he really so dense as to believe the nonsense he speaks on this issue? . . . based on the rest of his behavior . . . Okay, good point.
  • Immigration - The free exchange of labor is every bit as important a contributor (perhaps even a greater contributor) to our economic wealth as is the free exchange of goods and services. His attack on those not from around here is both disgusting and discouraging. Again, I hope this is a clone of the prior item where it is all about rhetoric and not action.
  • Nationalism - We don't need more tribal thinking in this world. Unfortunately, he nurtures this toxin. He wants revenge on those not allowing us to be great.
  • War - Here my outlook is just slightly negative. I'm grading on a curve based on the past two Commanders in Chief. I think he will tend to reduce the areas of conflict where both Bush and Obama took us. However, the risk he runs of allowing an awoken force from Russia or China is elevated compared to the prior administrations. Think reduced magnitude across the bulk of the probable war fronts but with increased risk in the extremes (tail risk).
  • Drug policy - I suspect he views drugs in the traditional simplistic framework (good versus evil). Drug users are rogues who must be dealt with. The first one to tell him he can't win the war on drugs will seal our fate in continuing the evil work that is that battle.
  • Government Meddling - From the Carrier deal to GM to you name it, the picture so far is bad for economic growth specifically and bad for liberty in general.
  • Free Speech - For as much as he deplores PC, he certainly can't take criticism. He has flat out said we need to reign in speech. 
  • Internet freedom - This may be a small issue, but perhaps it is a litmus test for how he will govern overall. He said we need to look into 'closing that Internet up'. His nominee for Attorney General, Jeff Sessions, as well as his vice president, Pence, are outspoken in their disdain for internet poker. They want to keep us safe . . . from ourselves and our choices.
  • Surveillance State - I suspect no relief. 
  • Gender Issues/Tolerance - While I actually think he actually takes a lot of unfounded and unfair flack regarding areas like race and sexual orientation, his sexism is undeniable. He is not just crude. He is misogynistic. It is hard to be very trusting that this strong character flaw and his errors in judgment don't and won't extend beyond objectifying women. 
Overall:

The Trump years (and they will be years despite the hope of so many for impeachment or that he would divorce America to be president of some younger Eastern European country) might be an odd combination of dramatic progress and colossal retreat. I think the eventual decisive factor will be how strong and righteous Congress is. I believe the case for optimism has a greater magnitude than the case for pessimism, but the negative sensitivity is high--meaning prospects are skewed with more downside risk than upside potential while the balance is still to the upside. 

Tuesday, January 20, 2015

Highly Linkable

Is that a Lite-Brite? No, it's NYC.

Have you heard the country song? It seems there is only one.

Five exam hacks to help you ace the final.

I tend to be an optimist about the future including and because of technology. I welcome the coming singularity. But I have to admit this concerned me and kinda shook me a little. More here.

How do you find something when a Google search isn't enough? Lifehacker suggests some options.

Looks like I need to change my views on flossing--and revise some other oral hygiene practices while I'm at it. (HT: Tyler Cowen)

The "coach who never punts", Kevin Kelley was interviewed recently on the AFA podcast. I predict in 10 years much of his heterodoxy will be orthodoxy.

Kevin Erdmann has a very good grip on housing policy. He Zoro's Shiller in a single paragraph and then proceeds to tear down all of the housing lobby's sand castles.

While we're calling out iconic economists, John Lee of Open Borders challenges Krugman greatly and Cowen to a lesser extent.

John Cochrane continues the craze taking on Keynesianism.

You might read this first before getting right to Pete Boettke answering Noah Smith's question on if economics swings left.

The zero-interest-rate environment succinctly explained with myths debunked by Scott Sumner.

Don Boudreaux offers some new year's advice on bad habits he wishes the government would break.

(UPDATE: housing policy link restored.)

Monday, October 14, 2013

Highly linkable

As politicians seemingly fiddle as we begin to dance on the ceiling, it is important to realize it is going to be okay. This actually is business as usual--it is just not usually so obviously unproductive. Wasting resources (through an unfettered process of spending money) apparently looks to the media and much of the public as productive progress. It is not. Arguing about the terms under which the money spending process will continue apparently does not look as productive. It is not that different.

Hey, guy who sells ethanol. Is it a good idea to create and foster a monopolistic environment in which you can operate?

Ethanol guy: "Yes!"

Everybody else: "Hell no, are you kidding!?!"

Casey Mulligan makes a strong case about just how high and damaging tax rates are today including as a result of Obamacare. Grumpy says he may be underestimating how bad it is.

Here is the long (and excellent) and the short on why Fama was an excellent choice to share the Noble Memorial Prize in Economics as announced today. Shiller and Hansen are also fine choices in my opinion. It is just that I believe Fama casts a big longer and a bit stronger shadow.

Wednesday, December 12, 2012

Dollars,Taxes

As we continue to hurtle ourselves toward the fiscal cliff as the Mayans predicted, the prospects for meaningful tax reform dwindles. I thought I'd take a second to reflect on some brief ideas about what good tax reform should encompass.

  • Simplification - this is the lower-hanging fruit. We need fewer exemptions, deductions, rates, categories, etc. Unfortunately, this reform has some of the biggest obstacles since so many vested interests are at stake. 
  • Eliminating the worst tax policies from an economic-desirability standpoint - this is where economics needs to trump emotion. We need to stop taxing capital--capital gains (both individual and organizational), dividends, interest, corporate profits, etc. These taxes are economically destructive. They discourage savings and lower the trajectory of economic potential. The economic distortion from taxation is no where more insidious than in capital taxation. There is certainly crossover between this reform group and the next. 
  • Eliminating the worst tax policies from a justice/fairness standpoint - this is where justice and ethics need to trump envy. We need to stop taxing estates. Death should not imply an additional tax liability. Not only does this tax unfairly tax wealth that has been repeatedly taxed already, but it also causes economic resource distortions as people go to great lengths to avoid the tax. Additionally, we need to stop taxing so progressively. Taxation that compounds as success increases assumes that property rights have a diminishing marginal validity. I fail to see how that can be a reasonable principled position. 
In a later post I plan to sketch out my idea of the tax policy I would most like to see replace our current nightmare. 

Thursday, October 25, 2012

Cliff Hanger


I mentioned in a post awhile back about writing a post concerning the spending side of the so-called Fiscal Cliff we are approaching. This is that post. Promise kept.

Don’t expect that same kind of responsiveness from Washington regardless of who wins the election. My expectation is that Rombama will deliver as much and as little as it takes to lie with a straight face that, "In the face of an epic challenge, the American people came together to forged a grand compromise. While this solution does not match the ideal of any one party or interest group, it does satisfy many of those goals and all of our greatest needs…." Disaster avoided, I am your savior. Or something to that political effect.

The spending side of the equation, forced spending cuts disproportionately affecting the Defense Department (because that is where the discretionary money is), is arguably the less concerning part of the equation. This is especially so in the long run. The short run effects of sequestration can be mostly if not entirely offset through proper monetary policy. The monetary authority must change expectations to demonstrate a willingness to accommodate any fiscal reduction. The political will for this is weaker than it should be, but it probably is strong enough and will strengthen in the put up or shut up point of fiscal cliff diving. The added bonus would be that monetary policy arguably has much less distortionary effects than does fiscal policy—the former says demand increases somewhere and the market guides the where, the latter says demand increases through government. Unfortunately, I don't think this will happen as I don't think we will fall off the spending fiscal cliff.

The tax side of the fiscal cliff remains the more imposing part and has the more important long-run considerations. The uncertainty alone is a source of reduced economic growth. I'm cautiously optimistic about the chances for tax simplification and otherwise meaningful reform. I'm more optimistic about tax rates and incidence not being as severe as a full plunge over the cliff would be. Here I think there will be a decent compromise, but most of the benefits will be in terms of certainty rather than good policy--we'll at least know how badly taxation will be moving forward.

Back to the spending, I am very pessimistic about the chances of substantial spending reform or reduction. That means the fiscal cliff is avoided from the spending side—we don't get the big cuts, hence we don't fall off the cliff with the associated risks to short-term growth. But the manner in which we avoid the cliff is in no way a sustainable path to fiscal prudence. For evidence supporting my view on spending and the compromise to come, look at how Obama defines a "grand bargain".