Have we gotten to the point where the Federal Reserve ought to start targeting a higher rate of inflation?
As someone who came of age during the Great Inflation of the 1970s and was looking for my first job just as Paul Volcker was trying to exorcise the demons, I never thought I’d ever say anything like that.
At 2:15 PM yesterday, the Federal Open Market Committee made a big symbolic move, announcing it would buy Treasury debt in the 2-year to 10-year range to keep its $2 trillion of securities holdings constant. Otherwise, the portfolio of agency and mortgage-backed debt would have run off at $10 billion to $20 billion a month as homeowners prepay mortgages. Although that would have been a miniscule tightening of monetary policy, the Fed acted to support economic recovery. It is also the first step toward future inflation. The Fed is already bumping into its self-imposed limit on purchasing no more than 35% of any Treasury issue. With no signs of major deficit reduction from Congress yet, the Fed may have to buy a lot more Treasury debt in 2011 and beyond.
Both Andrew and I are quoted in a mini-symposium on the revenue-maximizing top income tax rate; that is, the peak of the Laffer Curve, at which point a higher rate would leader to lower revenues.
I declined to offer a specific rate for various reasons: the short-term peak rate is probably higher than the long-term rate, it depends on whether there is an alternative lower rate on capital gains, it depends on the income threshold at which the top rates applies (see below), and various other things. And I certainly don't think that the top rate ought to be based solely on revenue considerations; the rate that maximizes growth is certainly well below the rate that maximizes revenue. That's why I said that we really shouldn't go above 50 percent even if it would raise net revenue, which it undoubtedly would up to a point.
House Minority Leader John Boehner (OH) has made some headlines over the past month about somehow stopping regulations from being issued next year. Boehner originally suggested a complete moratorium. He recently modified that to suggest something more limited.
The proposed moratorium was obviously an appeal to the financial community. The vast majority of regulations required by the Dodd-Frank Wall Street reform bill are supposed to be in place by close to the end of 2011 so the most immediate effect of stopping the regulatory process would be to put that law on hold.
But the real question is whether there's any way for Boehner to make his plan happen. The answer is no: The Dodd-Frank and other regulations are far more likely to move ahead than to be stopped.
The more you hear about the business community being worried about the future because it is "uncertain" about federal income taxes, the more you realize that it actually is the one pushing for increased uncertainty.
There already is absolute certainty about the tax cuts enacted in the early 2000s: Under existing law they expire at midnight December 31, 2010. Do nothing and we can all be absolutely certain that rates will go up. Somehow, however, that certainty is being defined as creating uncertainty.
By contrast, the changes to the existing law the business community is saying are so important to economic growth will require new legislation and, especially these days, the legislative process is about as unpredictable as you can get. So pushing for the three changes the business community says are so important to the economic recovery -- keeping the current rate on upper income individuals and the existing rates on capital gains and dividends -- has nothing to do with certainty and everything to do with lowering taxes compared to what they would be under current law.
With the departure of Christie Romer as chair of the Council of Economic Advisers, various commentators are pointing their fingers at National Economic Council director Larry Summers for pushing her out. I think this is not correct. It's rare for someone to stay in Romer's position much longer than she has and there is every reason to believe that she was anxious to return to Berkeley and also be considered for the position of president of the Federal Reserve Bank of San Francisco.
Troy, Andrew, Bruce, Pete, Ed, and I are pleased to announce that CG&G will be adding another big name to its roster of regular posters.
The newest member of the family will focus on national security overall and Pentagon and international affairs spending in particular.
Details and a formal introduction very soon.
New from Professors Philip Babcock and Mindy Marks is an analysis of trends in how college students are spending their time. The answer is "less studying, more leisure." The summary provided by the American Enterprise Institute is well worth the read. Their conclusions:
- Study time for full-time students at four-year colleges in the United States fell from twenty-four hours per week in 1961 to fourteen hours per week in 2003, and the decline is not explained by changes over time in student work status, parental education, major choice, or the type of institution students attended.
- Evidence that declines in study time result from improvements in education technology is slim. A more plausible explanation is that achievement standards have fallen.
- Longitudinal data indicate that students who study more in college earn more in the long run.
Why might achievement standards have fallen? Quoting Babcock and Marks:
This conjecture from Jim Pethokoukis would be shocking if it comes to pass:
Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:
For politicians, being "for'' is like being for mom and apple pie. That's why President Obama invited two restaurant owners named Pancake and Wheat to the White House in June to promote a bill to increase small-business lending, and why he recently visited with local business owners at the Tastee Shop Shop in Edison, N.J.
So it was probably inevitable that small busines would end up at the center of the war over extending the Bush tax cuts for the top 2 percent of households with incomes above $250,000. Republicans claim this would be a disaster for small business owners, because "50 percent'' of small business income would be "captured" by the higher tax rates. Democrats say that's baloney, because only 3 percent of small business owners make enough money to be in the top bracket.
