The Andrew Samwick Archives
The story of the miners trapped underground in Chile is fascinating. Even with the 4-inch boreholes that have been drilled to supply them with food, water, and electricity, the men are in for quite a challenge for the next several months while a new shaft is drilled for their rescue. Abetted by a gift of a Kindle reader, I have been doing some reading this summer about World War II and other parts of American history. Here are some of the books that have been inspiring stories of survival, with some links in case you want to read more:
Tears in the Darkness: The Story of the Bataan Death March and Its Aftermath, by Michael and Elizabeth M. Norman
Here's some new research by Ang, Bhansali, and Xing on the impact of Build America Bonds:
Build America Bonds (BABs) are a new form of municipal financing introduced in 2009. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB program has succeeded in lowering the cost of funding for state and local governments with BAB issuers obtaining finance 54 basis points lower, on average, compared to issuing regular municipal bonds. For institutional investors, BAB issue yields are 116 basis points higher than comparable Treasuries and 88 basis points higher than comparable highly rated corporate bonds. For individual investors, BABs have lower yields than regular municipal bonds. Thus, on average the Federal government subsidy disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.
The main point of Laura Tyson's op-ed in Saturday's New York Times is correct: we should be using the occasion of very low interest rates on government debt to add to our productive infrastructure.
But she makes a simple arithmetic error in the title, "Why We Need a Second Stimulus." In fact, what she's arguing for is not the second but the third stimulus. As is common with the current administration and its supporters, she forgets that the $150 billion infusion in early 2008 was a bipartisan attempt to prevent economic growth from stalling. The Obama administration is now populated by those who, in late 2007 and early 2008, were calling for a "timely, targeted, and temporary" bout of deficit spending to prop up the economy. They shouldn't be running away from it now.
Why does it matter what number stimulus this is?
Say the word "tax" to me and I'll pitch you higher carbon taxes, sometimes paired with lower payroll taxes in the form of a green tax swap. That's what I said to Chris Farrell, who wonders what else we might do to improve the tax code while everyone fights over whether the tax cuts from 2001 and 2003 should be extended. Jim Poterba and Joel Slemrod are also quoted in the article, pointing out the virtues of capping deductions in the current income tax system -- broaden the base so that marginal rates can stay low.
I think tax reform, fundamental tax reform, and the debate over the extension of these tax cuts are a distraction. Our big problem is that we don't raise enough revenue, not the particular forms in which we choose (not) to raise it. I think the right policy on the "Bush tax cuts" is to let them expire.
I was in Las Vegas for most of the last week, and blogging was (tied with a lot of other things for the title of) the furthest thing from my mind. But, being an economist, I am always on the lookout for markers of economic recovery. Walking around town, I noticed that there was barely any construction going on. There is a new facility going up at the Venetian complex, but nowhere else that I could see. But the best source of information always seems to be the taxi drivers. We took a total of four cabs, two of whom had chatty cabbies. The first told us that the recession ended in Vegas four months ago. Since then, things have been back to normal. The second suggested to us that the new normal wasn't as good as the old normal. Conventions that used to not only bring people but throw lavish parties were still bringing the people but not throwing the same kind of parties. Convention goers from nearby areas were finding their companies willing to fly them in and out for day trips rather than let them stay locally and potentially run up entertainment charges.
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:
I hate the idea of salary freezes. In one sentence:
If you freeze salaries, then only the people who don't deserve a raise get the raise they deserve.
Everyone else gets less, and the discrepancy is widest for the most productive people. Who decided this was an effective personnel policy? Why is it that when institutions are strapped for cash, they pay less attention to how they allocate their resources? When cash is scarce, we should spend our money more intelligently. What is intelligent about a compensation policy that fails to differentiate based on performance? Reduce staff. Set the baseline raise at a negative number. Do something, but don't force those who merit additional compensation to subsidize those who don't.
Here's the relevance today. The first two paragraph's of Scott Wilson's Washington Post article on the freeze on bonuses are these:
My New Year's Plea from 2007 has been getting some attention in the recent discussions over whether cutting tax rates will raise revenue. In this post, I'd like to follow up on the last line of that plea, which I have not seen recently quoted:
If I'm wrong, show me the evidence ... and tell me why the tax cuts were so small given their effects on revenues.
Restated, if these tax cuts raised revenue, then why not keep cutting them until the point at which revenues actually begin to fall? I presume the reason is that none of the proponents of this line of argument have any idea what the revenue-maximizing tax rate is. They only like to assert that we must have been past it because tax revenues eventually went up at some point after the tax rates were cut (ignoring the obvious counterfactual that it was economic growth unrelated to the tax cuts that pushed revenues higher and that they would have been even higher at the higher tax rates).
So the next question is simply, "What do the experts on your staff tell you that the top marginal tax rate should be in order to maximize tax revenues, leaving everything else about the tax code the same?" Journalists should relentlessly ask it of the Republican leadership in Congress who continue to make fallacious claims, and the Democratic leadership in Congress ought to ask it politely in a letter to CBO Director Doug Elmendorf.
I "missed" this earlier this week. Edward Niedermeyer is anything but charged up about the Volt:
So the future of General Motors (and the $50 billion taxpayer investment in it) now depends on a vehicle that costs $41,000 but offers the performance and interior space of a $15,000 economy car. The company is moving forward on a second generation of Volts aimed at eliminating the initial model’s considerable shortcomings. (In truth, the first-generation Volt was as good as written off inside G.M., which decided to cut its 2011 production volume to a mere 10,000 units rather than the initial plan for 60,000.) Yet G.M. seemingly has no plan for turning its low-volume “eco-flagship” into a mass-market icon like the Prius.
Quantifying just how much taxpayer money will have been wasted on the hastily developed Volt is no easy feat.
Coming up in tomorrow's Washington Post, Brookings economist Bill Gale discusses these five myths about the tax cuts passed in 2001 and 2003:
- Extending the tax cuts would be a good way to stimulate the economy.
- Allowing the high-income tax cuts to expire would hurt small businesses.
- Making the tax cuts permanent will lead to long-term growth.
- The Bush tax cuts are the main cause of the budget deficit.
- Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.
I recommend the whole thing. You can look through nearly 6 years of my blogging and not find a single post in support of these tax cuts. Whatever is left of them should be allowed to expire, and Congress should make its tax policy changes in a deliberate fashion.
Of the five myths that Bill discusses, I continue to find the first to be the most frustrating. Here's what Bill says about extending the tax cuts as a means of fiscal stimulus:
Tags:
Courtesy of The Rachel Maddow Show last evening:
New York City Mayor Michael Bloomberg gave the inaugural Presidential Lecture at Dartmouth yesterday. It was a very engaging hour, spent roughly half in lecture mode and half in Q&A. I think mayors are fascinating people to put in front of students. Most public policy issues have a local dimension, and in many cases -- health, education, the environment, for example -- local actors will play very important roles. And mayors are the people we elect to get things done. According to Bloomberg, what's the most important public policy issue facing the nation? Immigration.
Enjoy!
President Obama went to Holland, Michigan, yesterday to focus attention on the impact that the American Recovery and Reinvestment Act will have on communities hard hit by the economic downturn. Jonathan Cohn is on the case, and he describes the scene as follows:
Under the American Recovery and Reinvestment Act, the Department of Energy has made a mutil-billion dollar investment in electric cars, by providing matching grants to companies that help build the cars or the facilities that will help them run. One of those grants went to Compact Power, Inc, a subsidiary of a Korean company, in order to build a factory in Holland that will produce the batteries that go into Chevy Volts and other new electric vehicles.
The company, which matched the $151 million federal grant dollar-for-dollar, says the factory will eventually employ 300 people--most of them in the kind of well-paying manufacturing jobs that are increasingly hard to find. Eight other factories like it are under construction, most of them in the Midwest. By 2015, the administration estimates, domestic manufacturers will get nearly half of the batteries for plug-ins and hybrids from U.S. factories. Right now, car-makers rely almost entirely on foreign factories.
Cohn's is a thoughtful post in which he lays out the advantages and disadvantages of this investment as a strategy for recovery and reinvestment. I commend the whole thing to your attention. I would only add a few relevant points.
In a post last week, I remarked that, "In the world of fiscal policy, you could have left the planet for a year and not missed a beat." The post repeated my criticism, made frequently over the last 30 months, that there is a better way to deal with downturns than becoming mired in discussions of temporary, ad hoc stimulus plans.
But in the world of supply-side economics, you could have left the planet for much longer and not missed a beat. The latest quote making the rounds is this one, from Senate Minority Leader Mitch McConnell:
Jagadeesh Gokhale and Mark Warshawsky speculate on the reasons why this year's Social Security Trustees Report has been delayed from its usual spring release:
Given the lead times necessary to prepare the trustees' report, it is highly likely that a final draft report was readied by early March to meet the April 1 legal deadline. But the trustees' decision to table that report was clearly unopposed because Social Security currently has no confirmed public trustees. All of its current trustees are ex officio members of the Obama administration, leaving no one to register concern that delay would prevent the public from knowing how rapidly Social Security's finances are deteriorating.
The excuse for the delay is to take account of the effects of the new health care laws, passed at the end of March, on Social Security's finances--with the expectation that ObamaCare will restore a semblance of financial viability to the program. The new health care laws create the possibility of offsetting the recession-induced decline in payroll tax revenues if many employers substitute higher taxable wages in place of health insurance coverage for their employees.
In the world of fiscal policy, you could have left the planet for a year and not missed a beat. Charles Wallace, of AOL's Daily Finance column, quotes his interview with me as follows:
But Andrew Samwick, a professor of economics at Dartmouth College, says the proposed stimulus of about $80 billion is too small to do much good. He adds that unemployment benefits aren't the most efficient way to stimulate the economy.
"You're giving them money, but they're not giving you anything in return," Samwick says, rejecting the argument that unemployment benefits are usually spent immediately and thereby sustain the economy. "There's no virtue in spending money -- the government could do that directly," he says.
Samwick says he'd like the government to commit to a long-term spending plan costing hundreds of billions or even trillions of dollars to address the country's infrastructure needs, such as developing a smart grid for electricity distribution.
"All of those things use material that has to be produced, which means it creates jobs, or it creates new opportunities for people, where it creates employment as well," Samwick says. "Why is that not better than just giving the money to the states to compensate them for their own budget challenges or the unemployed?"
Chris Edley comes up with a smart way to assist the states in managing their fiscal challenges -- advance them the money, but don't give it away. From his op-ed in The New York Times:
Here’s how this would work. States already receive regular federal matching grants to help pay for Medicaid, welfare, highway construction programs and more. For instance, the federal government pays a share of state Medicaid costs, from 50 percent to more than 75 percent, depending on a state’s wealth. The matching rates were temporarily sweetened by last year’s stimulus.
But Congress should pass legislation that would allow a state to simply get an “advance” on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.
Back in September, I made a modest proposal to get the corrupting money out of politics: ban donations from any person who is not a voter in the election. Carol D. Leonnig and T.W. Farnam of The Washington Post give us a reason to update our thinking, Senate Majority Leader Harry Reid:
The senator began dialing old and new friends around the country, asking for their help. Many of them had one thing in common: They had a financial stake in legislation that Reid, as the most powerful member of the Senate, helps control.
One of the calls Reid placed seeking cash was to trial lawyer John Morgan. At a March party held at his home near Orlando, Morgan raised about $96,000 for Reid's reelection battle.
I'd like to augment the modest proposal with the following restriction, in a perhaps futile attempt to play whack-a-mole with this bribery.
I am less concerned about who will succeed outgoing OMB Director Peter Orszag than what the new budget director will do. We face an unusually high unemployment rate of 9.7 percent and ridiculously low interest rates, even out to 30 years. Cheap credit and idle resources present a great opportunity to borrow and spend, particularly for things we know we need.
I have long been a fan of countercyclical government investment. In January 2008, I proposed a better way to deal with downturns and a budget that plans for the future as a means of substantially increasing our infrastructure investment at the most opportune times in the business cycle. At the time, I was trying to push back against calls for "timely, targeted, and temporary" measures that would widen the deficit without building anything of lasting value. While that phrase has fallen out of fashion, the sorts of policies being discussed -- like the patchwork of relief programs that died in the Senate last week -- are the same old stuff. It is a sign of how poorly our system of governance works that we cannot even plan for something that we have been enduring for two and a half years.
