Thursday, September 30, 2010

Maybe Let the Bush Tax Cuts Expire?

Republicans used the Congressional mechanism of reconciliation to pass the Bush tax cuts. Reconciliation required that the tax cuts automatically expire on January 1, 2011. This is the law.

Democrats want to extend the Bush tax cuts for families making less than $250,000 (singles under $200,000). Republicans want those making over $250,000 included in the extension (never mind the merits or arguments of either side). But Members of Congress in both parties that voted for the Bush tax cuts knew the day of reckoning would arrive on January 1, 2011, now just three months away.

What’s different in 2011 as against 2001? For one, annual budget deficits are in the trillions, not hundreds of billions. For another, the public debt is approaching dangerously high levels, especially if interest rates should rise in the next few years and increase the cost of debt service.  Extending the cuts would add trillions more to the deficits and debt.

Perhaps we should let the law takes its course and see what happens. After all, those who predicted doom and gloom from the 1993 Clinton tax increases were wrong. Those who predicted that the economy would prosper due to the Bush tax cuts failed to foresee the Great Recession. Who can absolutely guarantee that letting the Bush tax cuts expire will spell Armageddon? The same people who warned that Clinton’s tax increases spelled disaster, when, in fact, they were followed by a stock market boom and budget surpluses?

Sure, other factors affect economic activity (e.g., monetary policy, labor markets, regulation, etc). But this is exactly the point.  A singular focus on increases or decreases in marginal tax rates, to the exclusion of other economic factors, does not necessarly result in hard times or prosperity.
 
Besides, extending the Bush tax cuts will remove pressure for real tax reform (e.g., the flat tax).

Wednesday, September 29, 2010

Warren Buffett, Obama Adviser

Legendary investor Warren Buffett was an adviser to Barack Obama’s presidential campaign. From time to time he continues to talk with Obama.

One of Obama’s signature campaign themes was the development of green technology to shift America and the world from heavy use of polluting carbon-based power to electric power. Electric vehicles promise a massive reduction in carbon emissions.

Warren Buffett is in China today (September 27, 2010). His first stop is Shenzhen, a city of 9 million that was formerly a small village, which Chinese leader Deng Xiaopong commissioned as China’s first Special Economic Zone in 1982. Shenzhen is headquarters of BYD, a Chinese electric vehicle manufacturer, in which Buffet thas taken a 9.89% stake for $230 million. Buffet said that he believes that the battery and car maker will play an important role in new energy technology.

Is there some reason that Buffett, an Obama adviser, has made this strategic investment in China, America's economic rival in green technology?

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Tuesday, September 28, 2010

America in Decline

Several scholars, most prominent among them Niall Ferguson, have written on America’s declining power in global strategic, economic, and cultural affairs. Their theme is not so much that America is undergoing a sharp decline in absolute terms, but that it is declining relative to its post-World War II superpower status and to the rising powers of China, India, Russia, and Brazil. America’s imperial overreach in the Middle East continues to drain resources, China, in contrast, is investing heavily in building relations with resource-rich nations around the globe.

Words have meaning. Ronald Reagan saw “Morning in America.” Confronting the Soviet Empire, he borrowed a pre-battle phrase from Maximus: “Strength and Honor.” His successor, George H.W. Bush sought a kindler, gentler America, implying that Reagan was too harsh. George H. Bush promised compassionate conservatism, implying that previous conservatives lacked compassion.

“Strength and Honor” anyone?

Monday, September 27, 2010

Americans Prefer Sweden

No. This is not a post about Swedish blondes. Rather, it is a survey of public opinion in the United States on the politically salient issue of the growing inequality in the distribution of income and wealth in the past decade or so.

In December 2005 two professors from Harvard and Duke conducted a survey of 5,522 Americans in 47 states asking respondents for their views on the distribution of income in America. An overwhelming 92% said they would prefer to live in a society with far less income inequality than the United States. The responses cut across all demographic and political lines. If given a choice, respondents said they would prefer a distribution which mirrors that in Scandinavia, especially Sweden.

Given the well documented disproportional gains in income and wealth accruing to the top 1% of U.S. households, it’s reasonable that 92% of those surveyed believe that too few are collecting and accumulating too much.

Opinions are cheap. Actions are costly. Statistics Sweden publishes data on immigrants to and emigrants from Sweden by country of birth and citizenship. In 2005, the net inflow of persons born in the U.S. immigrating to Sweden (inflow over outflow) was 372. Only 79 immigrated for work and 38 to study. Most was for (unspecified) family reasons.

It is noteworthy that the net outflow of Swedes in 2005 was 6,800 and 5,167 in 2004. The largest numbers of incoming arrivals replacing them were Poles, Germans, Russians, Serbs, Iraqis, Iranians, and Thais.

What about Swedes moving to America? The U.S. Office of Immigration Statistics publishes periodic reports on persons seeking legal permanent resident status by region and country of birth. Except for 2003, when the number was 963, more than a thousand Swedes requested permanent resident status every year between 2000 through 2009. (Only one married Tiger Woods).

Americans may prefer the distribution of income and wealth in Sweden to that in America but few are willing to work or study there. Sure, there are barriers of language, culture, climate, and other obstacles. But if the distribution of income and wealth are so important to decisions about where to live, why do thousands of Swedes pack up and leave every year.

Perhaps the two professors might consider conducting a survey of Swedes who have moved to the U.S. to find out why.

Thursday, September 23, 2010

Stimulus Evaluated with Facts

On September 19, 2010, the Business Cycle Dating Committee (chaired by my colleague Robert E. Hall) of the National Bureau of Economic Research (NBER) declared that the trough in business activity occurred in June 2009. That trough marked the end of the recession that began in December 2007 and the economy began to recover in July 2009, i.e., the start of the rising phase of the business cycle. The BCDC weighs several indicators of economic activity to reach its conclusion.

The stimulus, the American Recovery and Reinvestment Act of 2009 (ARRA), was signed into law on February 17, 2009, a month after Barack Obama was sworn in as president. The law authorized $787 billion as follows: $288 billion in tax cuts and benefits, $275 billion for federal contracts, grants, and loans, and $224 billion for education, health care, and entitlements.

The web site for ARRA shows that $158 billion in funds had been awarded for federal contracts, grants, and loans, but only $36 billion had been received by applicants between February 17, 2009, and September 30, 2009. Even if all $36 billion had been spent by June 30, 2009, its effect on the economy would be almost unmeasurable.

A large chunk of the tax cuts consists of making work pay credits against social security payments. Tax withholding tables adjusted to reflect less withholding means that no more than one-seventh of the total found its way into private hands for spending by June 30, 2009. The effect of making work pay tax credits on the economy would also be almost unmeasurable.

There is broad agreement that monetary policy played an important role providing financial resources to banks through lower interest rates and purchase of treasuries and other financial assets.

Some prominent economic figures (e.g., Warren Buffet) and politicians complain that the BCDC’s formula does not reflect the ongoing economic misery. But those emotive statements reflect personal judgments, not the official declaration.

Wednesday, September 22, 2010

Memo to Larry Summers

Thank you for your service to our country, especially given the financial sacrifice you made.

As you prepare to return to Harvard, you may wish to practice speaking at a normal cadence. You mastered the skill of filibustering answers during media interviews by speaking at a rate of 10 to 20 words a minute, with dozens of “uhs” in between words. You cured my insomnia. Please avoid any further interviews during your remaining months in the White House.

The cost of a year at Harvard exceeds $50,000 for those paying full freight. A few words a minute in the classroom will shortchange those students. Please keep that in mind when you begin to teach.

Your friend,

Thoughtful Ideas

Tuesday, September 21, 2010

Questions Seeking Answers

While Iraqis are being blown to pieces and America continues to spend borrowed money trying to build democracy in Iraq, where oh where is the new Iraqi government?

While Americans are being killed and injured and America continues to spend money building a viable Afghanistan, when oh when will Afghanistan have an honest election and an honest government?

If Republicans only care about tax cuts for the top 2%, how do Republicans ever win elective office?

If President George W. Bush was the decider and Karl Rove the political adviser, why did Democrats win the Congress in 2006 and the White House in 2008?

Did the stimulus lose jobs, create no new net jobs, create 350,000 jobs, create a million jobs, save or create 3.3 million jobs?

Why do intellectuals so dislike Sarah Palin and the Tea Party? Do the Tea Party and its candidates lack gravitas? Are they simpletons? Did the Tea Party cause the financial crisis and “Great Recession.” How has it taken down seven Republican establishment candidates?

Wednesday, September 15, 2010

Memo to Raul Castro

As you begin to shift from a command-and-control to a market economy, I suggest you stay clear of the IMF, IDB, WB, and Harvard University for advice.  Instead, send your team of economists to Estonia and Slovakia whose officials will be happy to share with you their success in transforming their economies after the collapse of the Soviet Empire.

In particular, you should study the flat tax as a good way to install a new revenue system.  Even Russia, your former benefactor, has flourished due, in part, to its 13% flat tax on personal income.

Best wishes for success in your reform program.

Alvin Rabushka

Tuesday, September 14, 2010

Modernizing China's Currency

China's currency, the renminbi (people's money), has been largely unchanged since the founding of the People's Republic of China in 1949.  It is issued in denominations of yuan (dollars), jiao, and fen (pennies).  It has been printed in two designs, the second with Mao Zedong's portrait on the obverse side and various scenes of China on the reverse.

Deng Xiaoping is the great mastermind of China's post-Mao economic reforms, which have transformed China from a backward to a modern country in three decades with a large and growing middle class.

To honor Deng, the People's Bank of China (China's central bank) should issue a new bank note denominated as 200 yuan (about $30) or 500 yuan (about $75).  Deng's portrait should appear on the obverse side with a picture of the Shenzhen Special Economic Zone on the reverse.  This would be especially timely given the 30th anniversary of the Shenzhen SEZ, an important step kicking off China's modernization, celebrated in early September 2010.

Monday, September 13, 2010

The Bond Vigilantes

A fiery horse with the speed of light,
A cloud of dust and a hearty Hi-Yo Silver!
The bond vigilantes ride again.  (HT: Lone Ranger)

Proponents of additional stimulus and/or further Fed easing have pointed to low interest rates to claim that "deficit hawks" and "inflation mongers" have no clothes.

That was ostensibly correct on August 31, 2010, when the rate on the 10-year U.S. treasury note closed at 2.48%. Ten days later, on September 10, it closed 32 basis points higher at 2.80%.

Why? Who’s to say. Nor does it matter why. What matters is that interest rates can almost turn on a dime.  What is not a serious concern today about deficits, debt, and inflation can become a Greek-like problem tomorrow.
 

Thursday, September 9, 2010

Obama Plants the Seeds of The Flat Tax

Speaking at Cayuhoga Community College in Parma, Ohio, on September 8, 2010, President Obama planted (perhaps inadvertently) the seeds of The Flat Tax.

The president called for full expensing (100% writeoff) of investment in plant and equipment for all U.S. businesses in 2011, thereby removing the current $250,000 limit in Section 179 of the U.S. tax code.

Obama’s 100% first-year writeoff leads, in a few steps, to The Flat Tax.

1. Make expensing permanent.

2. Apply the Alternative Minimum Tax (AMT) to all tax filers at a 19% rate. At the same time broaden the tax base by eliminating all deductions, exemptions, and credits except for a personal allowance.

3. Integrate the corporate income tax with the personal income tax at the same 19% rate. Eliminate double taxation of dividends, tax on capital gains, tax on estates, and deduction of interest.

Voila!

Wednesday, September 8, 2010

Democratic Stability in Iraq: Unity, Federation, Confederation, or Dissolution?

My Hoover colleague, Victor Davis Hanson, hits upon a growing divisive trend afflicting Europe in his column of September 6, 2010.

“Take Europe. The decades-old vision of a united pan-continental Europe without borders is dissolving. The cradle-to-grave welfare dream proved too expensive for Europe's shrinking and aging population.

“Cultural, linguistic and economic divides between Germany and Greece, or Holland and Bulgaria, remain too wide to be bridged by fumbling bureaucrats in Brussels. NATO has devolved into a euphemism for American expeditionary forces.

“Nationalism is returning, based on stronger common ties of language, history, religion and culture. We are even seeing the return of a two-century-old European "problem": a powerful Germany that logically seeks greater political influence commensurate with its undeniable economic superiority.”

The key word is “divides.” Culture, language, religion, and history are pushing Europeans apart. If this is happening in Europe, think Sunnis, Shias, Kurds, and other tribal groups in Iraq. I believe the best that can be hoped for is Swiss-style confederation, but even that may be too optimistic.

Tuesday, September 7, 2010

Stalemate in Iraq, Stealing in Kabul

Six months and still no government in Iraq. This is the new American-allied democracy in the Middle East that Americans have bled and paid for.

Improper off-the-books loans to friends and relatives of Afghanistan President Hamid Karzai to spirit money out of the country have put Kabul’s largest bank and financial system in danger. For this Americans are ramping up troop levels and spending?

Monday, September 6, 2010

Stimulus Vultures

President Obama plans to announce several additional packages this coming week to assist economic recovery. As the word “stimulus” has become toxic in Congress, look for other words to describe his proposals.

Proponents of additional stimulus, who wanted but did not get a bigger stimulus the first time around, complain bitterly that “deficit hawks,” who have found religion against more spending, are harming the economy. I think we might call these critics “stimulus vultures,” who eat up borrowed money (from foreigners and Americans) and taxes for payouts to political friends. Given the disagreement among economists on whether the stimulus was beneficial, or largely irrelevant and wasted, feeding more stimulus to the vultures can be dangerous to the nation’s health as it runs up more debt and increases future debt servicing costs.

Sunday, September 5, 2010

Baseline Schmaseline

In her final speech as head of the Council of Economic Advisers, Dr. Christine Romer said that she underestimated the severity of the Great Recession. Thus, while her forecast of the beneficial effects of President Obama’s stimulus was correct, it was based on the wrong baseline (state of the economy at the time she did her analysis). Had she correctly anticipated the severity of the recession, she would not have forecast unemployment remaining below 8%, instead of 9.6%.

If, on the basis of her economic expertise, she got the baseline wrong, why should we suppose she would get the forecast right? Just asking...

Friday, September 3, 2010

Memo to Tea Party Supporters

The original Boston Tea Party and follow-on dumping of tea in other colonies reflected anger at increasingly dictatorial British rule. I think it is important to be well informed about the Tea Party and related events leading up to the American Revolution.



To that end I recommend you buy a copy of my book, Taxation in Colonial America. The front cover is a contemporary depiction of the Boston Tea Party. Reading my book will help you fend off critics who say the American Revolution was not about higher taxes and bigger government.

Allons enfants de la Patrie!