Share This ]]>There is an important issue looming on the congressional horizon: how to address the expiration of the Bush tax cuts at the end of this year. We believe there is a consensus way forward, which is why we are introducing the Bipartisan Tax Fairness and Simplification Act of 2010.
By streamlining and modernizing the outdated tax code, our proposal would eliminate many of the specialized tax breaks that currently benefit one group of Americans over another. The changes we propose will create policies that benefit everyone. They include: fiscally responsible middle-class tax cuts, business tax breaks to help American companies compete globally and create jobs, and a fairer and simpler tax system for all Americans.
The lesson that reality has shown is that there is only an extremely weak multiplier effect for government spending, meaning a dollar spent by the government does not spread throughout the economy in the way originally modelled by Keynes. Moreover and a lesson made clear from the 2009 stimulus bill – getting legislators to allocate money quickly and then spending it is nearly impossible. The tendency is for government spending to dovetail recoveries. This seems to be what is happening now:
The approach this week of the stimulus program’s one-year anniversary sparked a fresh round of dueling partisan statements, as Democrats sought to credit the effort with averting a deeper recession and Republicans said the program deserved a failing grade. But in terms of spending, the stimulus is largely incomplete.
As the economy is recovering, the influx of the majority of the U.S. stimulus money will make the recovery look stronger and more swift than it would be absent extra government spending.
I’m going to walk through this article and try and break down some of the points because I think it is worthwhile to understand the workings of a currency and a federal-style system.
No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.
The narrative that I have been reading primarily follows the line of fiscal irresponsibility on the part of Greece and Spain or the recession for Ireland. Some have also tried to blame speculators for the troubles plaguing the Greek government. The opinion that the article goes on to argue is that monetary inflexibility across borders amplifies these small issues when adjustments cannot be made at the national level.
The result was rapid growth combined with significant inflation: between 2000 and 2008, the prices of goods and services produced in Spain rose by 35 percent, compared with a rise of only 10 percent in Germany.
And there’s not much that Spain’s government can do to make things better. The nation’s core economic problem is that costs and prices have gotten out of line with those in the rest of Europe.
Sustained inflation can prove quite damaging for an economy. Think – if the cost of your goods increase by 25% more than your neighbor of an 8 year period, then your value menu goes from $1 to $1.35. As prices increases, wages also have to increase so those fast food workers can afford to pay an extra $0.35 for part of a meal. Spain’s goods just don’t stay within the country’s borders though. Now, all of the goods Spain exports are relatively more expensive than other parts of Europe, making them less competitive.
Central bakers have well-tested tools for combating inflation. Control of the money supply and the ability to devalue the currency could have assisted Spain. Had they retained their own currency this would have been possible. Of course, had they retained their monetary system, they wouldn’t have experienced the advantages of participating in the Euro. So, I’m not arguing and neither is this article that Spain should abandon the Euro to reinstate some form of monetary sovereignty, but for the Euro to be sustainable through financial and economic crisis, the EU will need tools to deal with problems like this.
It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.
Wait….what?
Gordon Brown said on Wednesday the world’s leading economies were close to agreeing a global bank tax, amid hopes in Downing Street that a deal can be concluded at the G20 summit in Canada in June.
The prime minister said those with the “broadest shoulders” should pay more, and insisted that the tax would raise “a substantial amount of additional money”. He admitted: “It’s not as high as you would like it to be because of avoidance.”
I actually have no intention of answering the question posed in the title of this post, far too challenging for a blog post and likely too soon to really tell.
I do want to make a point though. As a response to the financial struggles of the past nearly 2 years, how are the most powerful nations in the world coming to this conclusion?
Logic –
1.Banks were profitable throughout the 90’s and early 2000’s
2. Some of this profit was derived from crazy financial instruments lacking transparency or regulation
3. Housing market started to fall
4. Banks balance sheets reveal mortgages are heavily wrapped up in these crazy financial products
5. Financial meltdown
6. Bailouts
7. They’re starting to recover…apply tax
1-6 is a bit of history of the last decade or so, 7 marks what the quotes from the FT indicate. We’ve had this same discussion before regarding the oil industry and the auto industry. During the good times rent seekers like governments and unions like to go after the “extra” profits of corporations (many of which are owned by average citizens through retirement investments). In the run up to the 2008 election and during the summer of record gasoline prices, it was all the rage to levy a windfall profit tax on oil companies. During the recession and a period of falling oil prices, the oil industry struggled a bit. Too bad the government didn’t take more money during the good times, right? That seems so obviously wrong that I shouldn’t have to say so. Take the profits now so we can bail them out later…is that really the answer? The auto industry seems to confirm this as well.
Let’s use the example of an individual again to make this a bit more clear. Let’s start with Person A. In the first 10 years of his life, Person A makes a lot of money, but never saves any. Instead, A buys things for his friends. In the second 10 years, Person A struggles with the economy and goes bankrupt. Now Person B. Person B also does well or himself, but saves money along the way in the first 10. When the economy goes sour, he relies on his savings and investments that he’s made.
The example is a bit crude, but it’s clear that when A acts with disregard to the second period, he’s worse off than had he planned for the uncertainty of the second period. Academically, I think this falls into the category of bounded rationality and probably some other temporal phenomenon, but the point is that people value their immediate situation more. On a collective scale, this might explain the rent seeking activities of governments, unions, and even shareholders during times of growth.
On the other hand, this does not explain the current reaction to the financial crisis. Populist angst against banks seems to lead people to support policies like this. Struggling governments seem to frame it as an easy solution. However, considering the recession and financial meltdown does it really make sense to tax the group that just broke down? Furthermore, does this do anything to remedy the root cause of the financial crisis? It seems to do the opposite. Taxes often have a tendency to discourage behavior that is transparently taxable. Read another way – could this be a recipe for more complex financial products that regulators (including the IRS) don’t understand?
The question to ask about the president’s eye-popping budget, also rolled out last week, is whether it prepares the country for its future—or shackles it to past decisions that our leaders would rather not confront.
This quote from an article written by the dean of the Columbia Business School summarizes many of my feelings on the subject of the size and budget of the U.S. government. Most of you probably heard recently about the $3.8 trillion Obama budget with future ‘plans’ for reducing the deficit. As I have said many times on this blog, budget deficits and national debt do not concern me too much. It certainly does not worry me nearly as much as a major meltdown of our financial system (which it appears has been avoided). But in the long-run a growing national debt can pose problems for the economic health of a nation. The analogous situation for an individual seems obvious: In the short-run using credit to purchase a car has great benefits – you can get to work and be productive. Using a credit card to finance monthly purchase regardless of your current cash flow and pay it back after you have your pay checks accumulated at the end of the month, makes sense. Taking out a loan to improve your house (although possibly questionable in the current housing market) can also make sense to increase the value of your home. In the long-run though, interests rates make the amount you owe sky rocket and your credit rating falls.
Even the NY Times is able to understand a reasonable approach to this problem:
No one is calling for balancing the budget in a single year. Yet small cuts now, with bigger steps such as limiting entitlement benefits in the future, might send a positive signal to the markets and perhaps spur the recovery.
What I can’t figure out is why the President’s budget and Congress aren’t taking this sort of attitude and putting it to work. I also can’t figure out why people mock the ‘tea parties’ going on around the country (which I’m not specifically endorsing, just observing a phenomenon in popular culture/media), but they laud to no end protests for global warming. Starting a popular political discourse for a slimmer, more efficient government seems like a great idea considering what the future could hold otherwise. I can guarantee if the government loses its credit rating, starts taxing at ridiculously high rates, and loses its credibility as a world financial leader no one is going to be too concerned about meeting CO2 reductions.
If someone in Congress or the White House can turn this around and by ‘this’ I mean the attitude that turns a blind eye to any sort of serious talks on fixing the budget and the fiscal status of the U.S. government, I would vote to re-elect them regardless of party or support them in their run for office. I have a feeling, though, that if I strictly hold that position, I might not be voting for anyone in 2010 or 2012.
Share This ]]>The U.S. economy surged at the end of 2009, a bigger-than-expected gain driven more by slower inventory liquidation than by consumer spending.
Gross domestic product rose a seasonally adjusted 5.7% annual rate October through December, the Commerce Department said Friday in its first estimate of fourth-quarter GDP.
Don’t read too much into this though:
“Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Federal Open Market Committee of policymakers said this week.
Not to say that this is not good news. Obviously, strong growth stats are great when compared to a year of the economy contracting. We should all be wary of over-celebrating two digits meant to estimate the aggregate activity of the world’s largest economy. Undoubtedly, this will appear in papers across the country and around the world this week. The WSJ does a good job of laying out what factors composed the growth and how those changed from last year or last quarter.
Here’s to hoping 2010 turns things around!
Share This ]]>If you have a minute and some interest in what the result of the financial crisis will be in terms of reforming financial regulation, then take a look at this article. In all honesty, it is a bit lengthy and will take you more than a minute, but it is worth the read. Otherwise, I wouldn’t have chosen it for this post.
It is an opinion piece from the FT that goes through some of the political reasons why this bill will be ‘too weak to succeed’ in regulating banks that have become ‘too big to fail’. It seems at best we will have a continuation of the Q1 2009 status quo with a few new acronyms reminding us that there are some new regulatory agencies. The rest of the changes, it seems, took place last winter. These weren’t fundamental changes to regulation, instead we now see a few less bank names in the newspaper because they have either gone out of business or merged.
Don’t get me wrong here. I’m not some vehement anti-Wall Street person. I thought the Wall Street/Main Street distinction that plagued the last election was slightly ridiculous. The point is, and I think this is one that I make frequently, government regulation and institutions shape the world that we live in for the better and the worse.
This is true for the incentives that tax schemes create, regulation of the health insurance industry, and of financial markets and institutions. I found this point in the FT article particularly interesting:
Nor is anyone talking seriously about using antitrust laws to break up the biggest banks – the traditional tonic for any capitalist entity that is “too big to fail”. Five giant Wall Street banks now dominate US finance. If it was in the public’s interest to break up giant oil companies and railroads a century ago, and the mammoth telephone company AT&T, it is not unreasonable to break up the almost infinitely extensive tangles of Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs and Morgan Stanley. No one has offered a clear reason why giant banks are important to the US economy. Logic and experience suggests the reverse.
If, as taxpayers, we are guaranteeing trillions of dollars of bank assets and the viability of something as fickle as a company, we should consider what we are getting into and whether there is a better way to organize that industry.
I’m not an expert on this subject, but I wonder if people who are experts (or even lawmakers) are considering the alternatives. This is just one idea that popped up on the computer screen of a twenty-something student. Where is the debate? I guess…it is not surprising that one ‘pet’ bill is being ushered through, while everyone tries to make their ends meet. I suppose, as the 2008 election showed us, voters want politicians to speak economics and business, but not so much that they lose their average Joe likeability.
Share This ]]>This week Mr. Fielding issued a statement: He would not be voting for the bill. He would not risk job losses on “unconvincing green science.” The bill is set to founder as the Australian parliament breaks for the winter.
Apparently, Nancy Pelosi knows something about economics that the Australians don’t.
Share This ]]>It’s clear that politicians have been dragging their feet on dealing with bad assets in banks. This topic certainly deserves a fool post, but since I’m on vacation, you get a link and a quote.
Share This ]]>ut the first-day verdict on the Dow Jones average went in the right direction for Mr. Geithner this time, up nearly 7 percent and 500 points, in contrast to the precipitous slide after Mr. Geithner’s first effort, when his inability to explain in any detail how the program would work left Wall Street jittery about whether the administration had a workable plan.
A Treasury spokeswoman insisted the only difference was that Mr. Geithner had the time to complete details so complicated that they amount to creating a new financial system with global reach. But beyond the substance, the administration also had a more careful plan in place to introduce the proposal, because neither Mr. Geithner nor Mr. Obama could afford another negative review.
Monica and I are heading west. Monica wants us to end up at the Grand Canyon in Arizona. I want us to end up in Mesa Verde National Park in Colorado. We’ll see what happens.
We stayed the night in down-state Illinois and we trucked through Missouri today and decided to do some sight-seeing in Kansas City. I’m excited, there is a really nice area called the Power and Light District that I look forward to exploring and getting a few drinks.
I hope everyone is having a great break (even though Minnesota lost).
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