Federal tax burden on the rich and poor

“From a recent CBO [Congressional Budget Office] report, here are effective tax rates (total taxes divided by total income) [of household income] for 2005, the most recent year available:

Per cent of
income paid Average
in taxes income ($)

Lowest quintile: 4.3 percent 15,900
Second quintile: 9.9 percent 37,400
Middle quintile: 14.2 percent 58,500
Fourth quintile: 17.4 percent 85,200

Percentiles 81-90: 20.3 percent 120,600

Percentiles 91-95: 22.4 percent 161,800
Percentiles 96-99: 25.7 percent 269,800
Percentiles 99.0-99.5: 29.7 percent 588,100
Percentiles 99.5-99.9: 31.2 percent 1,207,200
Percentiles 99.9-99.99: 32.1 percent 4,699,500

Top 0.01 Percentile: 31.5 percent 35,473,200

N.B.: These figures include all federal taxes, not just income taxes.

That is, even before the Obama tax hikes, the rich face average tax rates more than twice those of the middle class, and about seven times those of the lowest quintile. These data do not tell you the optimal degree of tax progressivity, but they do describe the starting point from which policy is working.”

Greg Mankiw, “Tax Rates of the Rich and Poor”, Greg Mankiw's Blog (26 February 2009).

http://gregmankiw.blogspot.com/


N. Gregory Mankiw is professor of economics at Harvard University and a former Chairman of President George W. Bush’s Council of Economic Advisors. His textbook is used in Regent’s Principles of Economics course.

Income in the above table include the entire range of pre-tax income available to households: Wages, salaries, self employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and retirement benefits such as Social Security, Medicare, and federal unemployment insurance plus various in-kind benefits such as food stamps, school lunches and breakfasts, housing assistance, and energy assistance). Taxes paid include Federal direct taxes such as income taxes and social insurance taxes and indirect Federal taxes such as corporate income taxes and the excise tax. The data do not include state and local taxes. DOW added the data relating to income to the above table. The CBO report can be downloaded from: http://www.cbo.gov/ftpdocs/98xx/doc9884/12-23-EffectiveTaxRates_Letter.pdf.

It is true that the richest one-hundredth of one per cent of households (“the richest among the rich”, in number, less than 11,500 households) have a disproportionate share of total household income but they also pay a very disproportionate share of Federal taxes. As an example, according to the CBO report, these households, only 11,500 in all in the country, pay 31½ of their income in Federal taxes, as shown above. But this small group of people account for 6½ per cent of all Federal taxes paid by all households and 8 per cent of all Federal income taxes paid. In contrast, the income tax liability of the two lowest quintiles, comprising 40 per cent of all households, is -7.5 per cent, meaning 45,800,000 households receive in total a net inflow of income -- a subsidy -- from the Federal income tax system equal to 7.5 per cent of all income tax receipts. This subsidy reduced their total liability for all kinds of Federal taxes to less than 4½ per cent of their household income, as shown in the above table.

In the campaign leading up to November’s election candidate Obama promised to remove even more households from the income tax rolls as he further raised taxes on the “rich” and expanded the subsidy to lower income households. This would further skew the differences in tax liabilities and benefits between these two groups.

To gain an idea of the total tax burden on American households one must also consider state and local taxes. In 2005, these taxes were more than 15 per cent of the national income. Because the “rich” pay a higher proportion of these taxes, it is likely that their share of these taxes was more than 20 per cent of their household income in that year. From the table above, one can see that the top 1 per cent of income earners pay nearly 30 per cent of their household income in Federal taxes. Adding the 20 per cent state and local tax burden to a 30 per cent Federal tax burden is a crushing burden on any family.

Further raising taxes on so-called “rich” families, as the Administration proposes, would transform a group of people already carrying far more than their "fair" share of the burden into slaves of the state.

Don Boudreaux on the market's unsung successes

“It's become an article of faith among lots of people that recent events prove (or at least suggest) that markets don't work very well.

Let's assume -- contrary to what my assessment of the evidence tells me -- that the housing bubble and its crash, along with the current ills suffered by Detroit and other sectors, are exclusively the fault of the market.

How much skepticism of markets would this fact generate relative to the amount of skepticism that is justified? I think way too much. The reason is that market successes go unnoticed and, hence, unappreciated.

The vast majority of market exchanges and relationships work smoothly and to the advantage of all participants. Indeed, the market works so well and so consistently that it creates ever-higher expectations among the broad populace. When these expectations are dashed, if only for a handful of persons and if only rarely, the market is deemed to have failed.”

Don Boudreaux, “The Unsung Successes of the Market”, Café Hayek Blog (2 March 2009).

http://cafehayek.typepad.com/hayek/


Donald J. Boudreaux is chairman of the department and professor of economics at George Mason University. He blogs at Café Hayek with Russell Roberts.

The point that Professor Boudreaux makes is a simple one. We must look at both the successes and failures of free markets and consider things both seen and unseen before we judge whether a market is on balance operating to the benefit of society.

Moreover, when we consider regulating markets we must also understand that if we interfere with the normal operation of a market it generates windfall gains and losses to market participates in ways that can to some degree be predicted by some participants. Because the effects of government controls can be foreseen, special interests attempt to shape regulation in their favor and benefit from any actions the government takes, usually at the expense of many others. Almost everyone changes their behavior in the face of the changed circumstances brought about by regulation. For this reason, in economic terms regulation inevitably introduces a net loss to the economy as a whole to the extent that many transactions that would have taken place without regulation do not take place once government controls are introduced, because the set of mutually acceptable possibilities has been reduced.

Granted at times free markets fail and take far too long to adjust and adapt to new trends and circumstances. And all too often they are uncertain in their operation and their implications for participants. But before we reject free markets in favor of government direction and control, we must consider the market’s unsung successes and all those transactions that wouldn’t take place if we adopted regulations and controls.

Joseph and the famine and Obama and the crisis

From the Book of Genesis, Chapter 47:

13: And there was no bread in all the land; for the famine was very sore, so that the land of Egypt and all the land of Canaan fainted by reason of the famine.

14: And Joseph gathered up all the money that was found in the land of Egypt, and in the land of Canaan, for the corn which they bought: and Joseph brought the money into Pharaoh's house.

15: And when money failed in the land of Egypt, and in the land of Canaan, all the Egyptians came unto Joseph, and said, Give us bread: for why should we die in thy presence? for the money faileth.

16: And Joseph said, Give your cattle; and I will give you for your cattle, if money fail.

17: And they brought their cattle unto Joseph: and Joseph gave them bread in exchange for horses, and for the flocks, and for the cattle of the herds, and for the asses: and he fed them with bread for all their cattle for that year.

18: When that year was ended, they came unto him the second year, and said unto him, We will not hide it from my lord, how that our money is spent; my lord also hath our herds of cattle; there is not ought left in the sight of my lord, but our bodies, and our lands:

19: Wherefore shall we die before thine eyes, both we and our land? buy us and our land for bread, and we and our land will be servants unto Pharaoh: and give us seed, that we may live, and not die, that the land be not desolate.

20: And Joseph bought all the land of Egypt for Pharaoh; for the Egyptians sold every man his field, because the famine prevailed over them: so the land became Pharaoh's.

21: And as for the people, he removed them to cities from one end of the borders of Egypt even to the other end thereof.

22: Only the land of the priests bought he not; for the priests had a portion assigned them of Pharaoh, and did eat their portion which Pharaoh gave them: wherefore they sold not their lands.

23: Then Joseph said unto the people, Behold, I have bought you this day and your land for Pharaoh: lo, here is seed for you, and ye shall sow the land.

24: And it shall come to pass in the increase, that ye shall give the fifth part unto Pharaoh, and four parts shall be your own, for seed of the field, and for your food, and for them of your households, and for food for your little ones.

25: And they said, Thou hast saved our lives: let us find grace in the sight of my lord, and we will be Pharaoh's servants.

The Holy Bible, Genesis 47, 13-25 (King James version, from Electronic Text Center, University of Virginia Library).

http://etext.virginia.edu/etcbin/toccer-new2?id=KjvGene.sgm&images=images/modeng&data=/texts/english/modeng/parsed&tag=public&part=47&division=div1


The Bible is rich in stories of past events that read like today and always provide a warning for today. Genesis, as one example, describes the world of all-powerful Pharaoh at the time of Joseph. In a dream Pharaoh is given a vision of a period of prosperity and penury, which Joseph interprets as a forecast of what is to come. Seven bountiful years of abundant harvests, Joseph tells Pharaoh, were to be followed by seven years of famine when, evidently, the overflowing waters of the Nile would fail to appear and the land would not produce its bountiful harvest.

As the famine began to take its toll, people became increasingly willing to give up anything in return for food. First they paid for grain with money, until the money ran out. Then they paid with their cattle and livestock, until they had no livestock. When Pharaoh had all the money and livestock and the people again became hungry, all they had left was their land and themselves, which they gave up for a meal. Having given up their money, livestock and land, they were reduced to bondage and serfdom. And still the people grew hungry, and in return for seed to grow more food they agreed to give back one-fifth of what they grew. In this story, over time, as people faced an increasingly difficult situation, independence and exchange gave way to serfdom and dependence and taxation, and through it all people moved willingly and with gratitude to those who became their taskmasters, even someone like Joseph, who while he gained nothing for himself yet he made them and their children servants forever.

Following a worldwide economic upturn of seven years, this country and the rest of the world have now entered what would appear to be a prolonged period of pronounced economic decline and spreading turmoil. World trade and industrial production have collapsed, bank failures and corporate bankruptcies are accelerating everywhere, plant closings and housing foreclosures are on the rise, currencies are teetering in foreign exchange markets, and many tens of millions are unemployed across the planet. In the midst of this worsening situation, government budgets are not only strained but under immense pressure to repair their insolvent financial systems, boost domestic levels of economic activity and employment, and address the need to encourage a buoyant international economy from whence much of their past rising productivity can be traced. And like the Pharaoh of millennia ago, governments and their leaders are increasingly besieged by scared people to help them through this crisis.

And like the people of millennia ago, the lure of serfdom for the feeling of security haunts the thoughts of those who have lost so much and fear so much for the future. In the back of their minds is the same natural inclination of mankind for someone to take charge in a crisis and save them from the catastrophe that threatens their future and that of their children. Many of these people see Barack Obama as a leader that appears to be just like Joseph: Confident and self-assured, intelligent and forward-looking, strong and stern at times and yet considerate and compassionate when necessary. And in some ways, as a leader in the midst of a crisis he seems to act just like Joseph: Always acting in the name of the state, always after people’s money, always promoting a vision of immediate hardship but ultimate achievement, always sure of his own message and what needs to be done, and in the end, when people are weak in their love of freedom, always furthering their dependency on the state.

However, Joseph also re-planted the seeds of private ownership and self-reliance when he initiated a policy of letting the Egyptians keep 80 percent of the crops grown from the seed Pharaoh gave them (Genesis 47:23-26). While the government provided the bare necessities to keep life going during a time of unprecedented need, under Joseph’s wise direction it also laid the foundation for long-term stability and prosperity in which the worker could keep the most of his increase and in which he assumed responsibility to feed himself and his children (47:24). This is in keeping with the Biblical principles of private ownership of property (Exodus 20:15), people being rewarded for their hard work (Romans 4:4; 1 Timothy 5:17,18; cf. Proverbs 6:6-11), and the supreme importance of providing for one’s own family, which outweighs even our responsibility to other “spiritual” priorities (1 Timothy 5:8).

Where Obama differs from Joseph is in the American president’s desire to “re-make” America into a country of continuous collectivist responsibility for one another rather than a nation of self-reliance and dependence upon the family unit. Obama’s vision in contrast denigrates the role of the family by reassuring the public that the government (i.e. “your neighbors”) will assume responsibility for the needy via a plethora of new government programs. Thus families need not keep track of hurting relatives because the state promises to do so, albeit in a colder, more sterile fashion. Rather than allowing families to keep the vast majority of their income, as Joseph did with his 20 percent tax rate, President Obama is raising taxes to confiscatory levels, so that parents will bequeath less to their children and have less to invest in their neighbors’ businesses. This will stagnate or stifle economic growth, depressing wages and our overall standard of living for years to come. Instead of encouraging each family to grow its own wealth and take care of its own, as Joseph did, Barack Obama is enlarging the role of government and “collective” responsibility, in which it is not clear who exactly is responsible for another human being other than the collective “whole.” In these and many other ways he is trampling God’s wisdom for ordering society.

Joseph took his people through a crisis situation but laid the groundwork for them to become self-sufficient when times returned to normal. Barack Obama is taking a crisis and using it to increase Americans’ dependence upon the government for important commodities like food, health-care, housing, education, energy, and their retirement incomes, among other things. The huge and expensive government infrastructure he is expanding will be difficult to shrink if too many Americans grow lazily accustomed to it. At the same time, it is hard to imagine how the government can deliver all that it is promising to give through such a complex and bankrupt bureaucracy. One must wonder why Mr. Obama does not follow the example of Joseph in providing intensive assistance only for the short run and otherwise throwing the responsibility for long-term prosperity back to the individual American and his family, where such responsibility belongs.

The real threat of the current economic crisis is that desperate citizens are willing to enter permanent servitude in a false rush to alleviate their immediate misery. President Obama seems to be the right man to hasten this rush into serfdom.

A tip of the hat to my daughter Joy for her contributions.

Did Bernanke say the recession will end this year or not?

“The headline for the Wall Street Journal News Alert Tuesday morning reads "Bernanke Says Recession Should End This Year."

But the text of the message, summarizing the news from the Federal Reserve Chairman's testimony before the Senate Banking, Housing, and Urban Affairs Committee Tuesday morning adds a big "if":

"2010 'will be a year of recovery,' if actions taken by the government lead to some stabilization in financial markets."

And the actual text of his prepared remarks reveals further qualification: (Bold mine.)

If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.

That's not just a big "if." That's a giant, honking, humongous, get-down-on-your-knees-and-pray-for-salvation "if." Ben Bernanke predicts that we can hope for an economic recovery next year, only if government action is effective -- and that includes, in his view, Treasury Secretary Tim Geithner's plan to bring stability to the banking system, the details of which are still unknown.

In the full context of his remarks, Bernanke doesn't sound all that optimistic. (Bold mine.)

This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets.

So let's retitle that WSJ News Alert: "Bernanke Warns That Without Aggressive FDR-Style Strong Government Action to Boost the Economy, We're Doomed."”

Andrew Leonard, “Ben Bernanke makes the case for strong government”, Salon.com (24 February 2009).

http://www.salon.com/tech/htww/2009/02/24/bernanke_and_economy/index.html


Andrew Leonard is a senior technology writer for Salon.com and a contributing writer for Wired Magazine.

My headline would have been “Bernanke says recovery possible next year but downside risks predominate”.

The written remarks by the Fed Chief provide an overview of recent developments and the steps that have been taken to counter the severe contraction the U.S. economy is now experiencing. The text also provides some cheerleading remarks about questions Congress has had about the transparency of decision making at the Fed. It ends with a review of the recent revisions made to the Fed’s economic outlook and its projections, pointing out that they have been revised substantially downward since the last set were released in October.

It is to be noted that there is nothing in the prepared remarks that associates the Fed with the policies of the Treasury or the Administration nor is there anything that indicates that the Fed believes these policies will necessarily be successful. Part of this is no doubt the traditional independence and “stand-offishness” of the Fed, which does not wish to be identified with the policies of any Administration. But I think it also expresses the fact that we still do not know exactly what the Administration proposes to do in the area of reforming and restructuring the financial system. Even in the area of spending, it is not clear what the Administration wants to do or how it intends to actually implement the spending that has been approved. Given all these uncertainties, Bernanke is right: Everything about the prospects before the economy depend on a great big “if”, and, if truth be told, we don’t even know what that the actions behind that “if” is.

A "Thank you" to Mark Thoma of Economist’s View for the pointer.

Roubini on how to clean up a banking system

“There are four basic approaches to cleaning up a banking system that is facing a systemic crisis: recapitalization of the banks, together with a purchase of their toxic assets by a government "bad bank"; recapitalization, together with government guarantees – after a first loss by the banks – of the toxic assets; private purchase of toxic assets with a government guarantee (the current US government plan); and outright nationalization (call it "government receivership" if you don't like the dirty N-word) of insolvent banks and their resale to the private sector after being cleaned.

Of the four options, the first three have serious flaws. In the "bad bank" model, the government may overpay for the bad assets, whose true value is uncertain. Even in the guarantee model there can be such implicit government over-payment (or an over-guarantee that is not properly priced by the fees that the government receives).

In the "bad bank" model, the government has the additional problem of managing all the bad assets that it purchased – a task for which it lacks expertise. And the very cumbersome US Treasury proposal – which combines removing toxic assets from banks' balance sheets while providing government guarantees – was so non-transparent and complicated that the markets dove as soon as it was announced.

Thus, paradoxically nationalization may be a more market-friendly solution: it wipes out common and preferred shareholders of clearly insolvent institutions, and possibly unsecured creditors if the insolvency is too large, while providing a fair upside to the tax-payer. ....

Nationalization also resolves the too-big-too-fail problem of banks that are systemically important, and that thus need to be rescued by the government at a high cost to taxpayers. Indeed, the problem has now grown larger, because the current approach has led weak banks to take over even weaker banks.

Merging zombie banks is like drunks trying to help each other stand up. JPMorgan's takeover of Bear Stearns and WaMu; Bank of America's takeover of Countrywide and Merrill Lynch; and Wells Fargo's takeover of Wachovia underscore the problem. With nationalization, the government can break up these financial monstrosities and sell them to private investors as smaller good banks.

Whereas Sweden adopted this approach successfully during its banking crisis in the early 1990's, the current US and British approach may end up producing Japanese-style zombie banks – never properly restructured and perpetuating a credit freeze.”

Nouriel Roubini, "Time to Nationalize Insolvent Banks", Project Syndicate (February 2009).

http://www.project-syndicate.org/commentary/roubini11/English

http://www.project-syndicate.org/contributor/1095

Professor Nouriel Roubini (1959-) teaches economics at the Stern School of Business, New York University and is Chairman of RGE Monitor, an economic consulting firm. He has wide experience in academia, the Federal Reserve, Council of Economic Advisors and Treasury, and international financial institutions. Roubini is also known as “Dr. Doom”, for his early and pessimistic warnings of an economic crisis that would engulf the U.S. and the world.

Had we from the beginning worked systematically to identify those banks that were insolvent from those that were weak from those that were satisfactory, and immediately closed down the insolvent ones and worked to save the weak ones, we would have had some hope of saving the situation. But we didn’t. Instead we followed several strategies to “try and save” the situation and avoid the losses entailed in shutting down failed banks while propping up weak ones. Money was thrown at the banks and efforts were made to put a floor under the price of toxic assets. As we did so, the bad banks ate good banks and toxic assets were spread further across the financial system. We created zombie banks that are now a bigger threat to the health of the economy than the insolvent banks of the past ever were.

We may now have no choice but to shut down them down by having the government take them over in some sense of the word. In the case of little banks, this is not a problem, as the FDIC has (unfortunately) lots of experience closing down small banks. But large banks are not really banks, or rather are much more than banks. Financial holding companies such as Citigroup are huge entities, really financial conglomerates with a myriad of different kinds of financial services under a umbrella of different sub-companies with a complex web of debts owed and debts due, all of which we need to be sorted out. The only ones that will come out ahead in any nationalization of the banks (I can see Professors Folsom and Davids cheering now -- just kidding) will be the lawyers. The rest of us will simply suffer, suffer, suffer in ways we cannot even anticipate because nationalizing big bank holding companies is far more complex and far more fraught with the possibility of the pain spreading far and wide than people realize.

Professor Roubini’s home page is http://pages.stern.nyu.edu/~nroubini/.

Thanks to Larry Willmore for the Tdj.

The "paradox of thrift" and fiscal stimulus

“The "paradox of thrift," a celebrated chestnut first described by John Maynard Keynes in the 1930s, has been the source of much confusion about how saving affects the health of the economy. Intuition suggests, correctly, that if any one family saves an extra $100 this year, its bank balance at year's end will be higher by that amount. According to the paradox of thrift, however, if everyone tries to save more at once, total savings will actually fall. ....

At moments like these [economic recession], government is the only actor with both the motivation and the ability to jump-start the economy.

Passage of a robust stimulus bill has rightly been the Obama administration's highest priority since taking office last month. As Keynes explained during the Great Depression, increased public spending would help end the downturn even if it were for useless activities like digging holes and filling them back up. It would obviously be better if the extra spending went for something useful. And as it happens, decades of infrastructure neglect, combined with huge state and local government budget shortfalls, provide more than enough valuable projects to put everyone back to work.

Bizarrely, however, some Congressional critics have denounced the administration's stimulus proposals as "mere spending programs." Of course they're spending programs! More spending is exactly what we need. The imperative is to get this legislation passed and get the spending started right away. ....

The "paradox of thrift" applies only during economic downturns .... Most of the time ... the economy operates near full employment. Before long, it will again. Under those circumstances, if every family saved a little more, extra money would flow into the capital market, causing interest rates to fall and investment spending to rise.”

Robert H. Frank, "Economic View: Go Ahead and Save. Let the Government Spend.", New York Times (15 February 2009).

http://www.nytimes.com/2009/02/15/business/economy/15view.html

[DOW: Cornell economist Robert H. Frank is currently a visiting professor at New York University's Stern School of Business.

Yes, the “paradox of thrift” exists, and with households attempting to save more than in the past government expenditures can counter the deflationary effects of this increased saving by injecting spending into the economy. But so would an increase in private investment expenditures, maybe not completely, but with some impact. Yet nothing was done in the recent stimulus package to encourage
investment.

Further, the assumption by Frank is that the stimulus package will have its intended multiplier effects. The contention of critics of the package is that it will not work and will only increase the national debt.

Time will tell whether the boosters or the critics of the stimulus package are right.

Once again, thanks to Larry Willmore for the Tdj.

China's exchange rate policy

“Just before his confirmation as Treasury secretary, Timothy F. Geithner turned up the heat on the Chinese regarding the dollar-yuan exchange rate. President Obama, he said, "believes that China is manipulating its currency. Countries like China cannot continue to get a free pass for undermining fair-trade principles."

Like many economists, I cringe whenever I hear the term "fair trade." It is not that I am against fairness — who is? — but the word "fair" is so amorphous in this context as to defy definition. Most often, the slogan "fair trade" is little more than a rallying cry for protectionism. ....

Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy. ....

Mr. Geithner and other China critics might also want to ponder how the Chinese keep the yuan undervalued. The essence of the policy is supplying yuan and demanding dollars on foreign-exchange markets. The dollars that China accumulates in these transactions are then invested in United States Treasury securities.

So when the Treasury secretary complains about the undervalued yuan, his message to the Chinese boils down to this: Stop lending us money. ....

As the United States embarks on a path of unusually large budget deficits, the nation's chief financial officer should pause and think carefully before turning up the heat on one of its biggest creditors.”

N. Gregory Mankiw, "Economic View: It's No Time for Protectionism", New York Times (8 February 2009).

http://www.nytimes.com/2009/02/08/business/economy/08view.html


LW: Very clear thinking from Harvard economist Greg Maniw, professor of economics at Harvard and author of a best-selling economic principles text. Mankiw is a Republican, but his message is basic economics, not partisan at all. There is much more in the full column, which is worth reading.

DOW: I agree with Larry. Given our present policy approach, we have become dependent on China to finance our budget deficit. If we go down this road we have to be careful about what we say about their policies. It would be unwise to complain about the undervalued yuan if it is a key source of the financing for our outsized budget deficits.

But we should ask why we put ourselves in this position. It is not just that we are dependent. That is bad enough. But now we are dependent on an undependable rival facing its own internal economic problems over which it has no real control. Obama is not just gambling that his policies will turn around the U.S. economy; he is also gambling that the Chinese will be willing and able to fund much of the deficit his policies create.

I for one do not think this is wise.

Thanks to Larry Willmore for this Tdj.

Politics and the dismal science

“Economists are failing to express anything resembling consensus on the most basic questions of economic policy. ....

I had thought they would at least agree that raising trade barriers at a time like this must be a bad idea. Then I read Paul Krugman, Nobel laureate, Princeton professor, and New York Times columnist, explain that raising tariffs – though perhaps unwise for other reasons – "can make the world better off". .... What are his readers to make of this? Are all the economists who say otherwise just wrong? ....

Just as there is a consensus among economists that protectionism should be opposed, most economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to "magic". ....

The problem is not that Mr Krugman questions the consensus on trade (if indeed he does), or that Mr Barro questions the consensus on fiscal policy (as he certainly does). It is that both set the consensus aside so carelessly. In doing so, these stars of the profession destroy the credibility of their own discipline. Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. ....

Consensus economics does exist. The Obama administration and the Federal Reserve are trying to apply it. The economics professoriate has an obligation to criticise and improve those policies. But if politics is allowed to split the discipline, and communication across that divide continues to break down, the science of economics will forfeit what little respect it still commands.”

Clive Crook, "Politics is damaging the credibility of economics", Financial Times (9 February 2009).

http://www.ft.com/cms/s/0/437694de-f602-11dd-a9ed-0000779fd2ac.html

Clive Crook confesses that he is not an impartial observer: "As a lapsed member of the guild – I had a spell as an economist in the British civil service – I have a lingering sentimental attachment."


Clive Crook is a senior editor of The Atlantic Monthly, a columnist for National Journal and a commentator for the Financial Times. He was formerly on the staff of The Economist. A graduate of Oxford and the London School of Economics, he has served as a consultant to the World Bank and worked as an official in the British Treasury.

I think it is worse than Crook says. Here Crook says that two eminent economists are confusing the public and policy makers about economic policy because they insist on jousting in public about the rough edges of what is a professional consensus -- protectionism is bad in trade and a fiscal stimulus is helpful in an economic downturn. The implication is that if either of these economists had the responsibility of designing policy they would follow the professional consensus and forget about the minor exceptions to the consensus that are so close to the hearts of editors of economic journals seeking to publish something new between the covers of their little read periodicals.

More important is the failure of that consensus, modified or not by the luminaries of the profession, to provide any real guidance as to what to do in the present circumstances. I wonder if anyone has noticed that nothing policy makers have done in the name of macroeconomic theory has actually helped one iota.

It is even worse than this. On the monetary side, we have gone through many iterations of the TARP in a concerted attempt to give away $700 billion and, despite the Treasury saying the world as we know it would end if Congress didn’t immediately approve every penny, only half the money has been used and more importantly not one thing in the banking sector has actually improved. Trillions of dollars in additional obligations have been assumed by the Fed and the Treasury and hundreds of billions of dollars have been injected into the system and still banks act as if they are broke and cannot lend. Rumors of the nationalization of banks, closures of banks, creation of new banks, packages of loan guarantees, purchases of stock in financial companies, new kinds of insurance for financial institutions, support for/closing down zombie banks, and now the suggestion of an “aggregator” bank to warehouse toxic assets while they await purchase by gamblers have all be put forward in just a few months. All these suggestions in the name of macroeconomic theory.

On the fiscal side, the stimulus package now being discussed in Congress bears little resemblance to any sensible “timely, targeted, and temporary” program, to use the words of the President’s key economic advisor, that theory suggests should underlie policy at this time. Although Congress appeals to macroeconomic theory for justification of what it is doing, in fact what it is doing has nothing to do with macroeconomics. Yet macroeconomists claim to support the package in the name of theory.

If discussions of macroeconomic policy both confuse policy making and are irrelevant to the actual policy making process, fights among macroeconomists are the least of its troubles. Simply stated, it has utterly lost its justification for even being part of the policy making process.

Thanks to Larry Willmore for the Tdj.

Development, population growth and poverty

“President Obama has ended the ban on federal funds imposed by the Bush Administration on groups that promote or perform abortions abroad and on the United Nations Population Fund. He must take this opportunity to put pressure on the UNFPA to concentrate on the health of women and babies--and to stop wasting money assaulting the poor with wrongheaded population-control schemes.

"Continued rapid population growth poses a bigger threat to poverty reduction in most countries than HIV/AIDS," the UNFPA said in an hysterical statement on World Population Day, last July. This is plain wrong: it is not human numbers that cause poverty, but bad economic policies, laws and institutions.

The densely-populated Netherlands and Japan are prosperous but poor in resources, while much of impoverished Africa is thinly populated but rich in resources. The United States rose to affluence with one of the world's highest long-term population growth rates, while now-prosperous Ireland had negative long-term rates. Clearly, neither human numbers nor natural resources are keys to the modern story of global wealth and poverty.

It is clear that neither human numbers nor natural resources are keys to the modern story of global wealth and poverty.

The UNFPA talks of "women's empowerment and gender equality" and "universal access to reproductive health" but, despite this politically-correct discourse, it remains committed to its original purpose of reducing population growth: reproductive healthcare is "the most practicable option for slowing population growth," it says, equating this with poverty, food insecurity and environmental degradation.

These fallacies hark back to the 18th century economist Thomas Robert Malthus. Like many other pressure groups and NGOS, the UNFPA continues to commit elementary analytical errors: ignoring evidence staring us in the face.

The 20th century saw human numbers quadruple to more than six billion but food production widely outstripped population growth, average life expectancy doubled to well over 60 years, while global GDP per capita more than quintupled.

In the 1960s, alarmists such as Paul Ehrlich predicted imminent mass famine around the world. Indeed, in the last couple of years global food prices briefly shot up--maize, wheat and rice all doubled or tripled in a short time--but fell back again. In fact, the long-term trend in real grain prices over the past century has been heading steadily downward, at an average of seven to 10 percent per decade (depending on the product).To be sure, a horrifying number of people today still live in squalor, scourged by disease and hunger--but the correct name for this is poverty, not "overpopulation." In countries where people cannot securely own property, cannot sell their produce freely and get scant protection in law, government is poverty's handmaiden.”

Nicholas Eberstadt, “Curbing the Myth of Overpopulation to Fight Poverty”, China Post (Taiwan) (7 February 2009).

http://www.aei.org/publications/pubID.29350,filter.all/pub_detail.asp


Nicholas Eberstadt, one of the country’s foremost demographers, is the Henry Wendt Scholar in Political Economy at the American Enterprise Institute.

Overpopulation is not now and never has been a problem before mankind. Levels of living have risen in the past as human numbers have increased, not the reverse, and as the level of living has risen fertility has declined. Under its medium-variant projection of world population growth, average world fertility is expected to decline steady from now to mid-century, and to fall below the replacement rate of an average of 2.1 children per woman by 2040. In the more economically developed areas of the world fertility is now significantly below replacement and some of these countries are already experiencing population decline.

Nor is running out of resources or a shortage of food at the global level a problem, although it is at the regional and country levels for reasons having to do with poor economic mananagement. Food, metals and petroleum prices on international markets, which had risen significantly during the global upturn of the middle of the decade, have fallen back since the summer and are likely to resume their longer-term downward trend. This long-term trend is not consistent with the hypothesis that population is pressing on the world’s available resources.

Finally, Eberstadt is right to emphasize that development depends on policies, not resources or population densities. The world does suffer from terrible poverty, far too much poverty, with almost three billion people subsisting on two dollars a day or less. Successful development to reduce that poverty requires a strong respect for the efficiency of markets and a supportive environment created by public institutions rooted in the rule of law, respect for private property, a stable financial system and an emphasis of education. An open orientation to the world economy also contributes markedly to the process of development, especially small countries.

If international agencies are to contribute to the acceleration of development in the world’s poorest countries, they should respect the lessons learned from the past and emphasize those policies that truly promote long-term development rather than a futile and unnecessary attempts to bring down population growth in the short-term.

Thanks to Professor Bom for the pointer to the Tdj.

Should the IMF allocate more SDRs to fight the global downturn?

“This one seems a no-brainer to me. The easiest and quickest way to create global liquidity and enable credit-starved emerging and developing countries to increase their spending is for the IMF to engineer a vast new SDR [Special Drawing Rights] allocation. It can be done at the stroke of a pen, and it does not require the IMF to negotiate a program for every country that needs a loan.

Let's remember some basic facts. The U.S. fiscal stimulus will be a lot less effective if it is not accompanied by similar fiscal action elsewhere. Developing nations are severely limited in what they can do in this respect because they have little room for domestic borrowing. Serious fiscal stimulus requires that they have resort to external resources, of which there is a severe shortage at the moment (both because of the flight to quality and the borrowing that is going on in the developed world). The existing swap lines and the IMF's new short-term lending facility have had few takers, in part because no country wants to signal that they are (or may be) in trouble and running out of resources. A generalized SDR allocation--in return for a commitment to spend a share of these resources in pursuit of a globally coordinated fiscal stimulus — would give countries the cover needed to do what is good for them and for the rest of the world without suffering a reputational penalty.

The main objection to the creation of SDRs has always been that this would be inflationary. In the current environment, this is a plus rather than a minus. Inflationary, you say? Pile it on! That is exactly what the doctor ordered.

So if you want to reduce protectionist pressures in the U.S. and elsewhere while helping the developing countries get over a crisis that is not their doing, SDRs can be a large part of the solution. So I repeat my question: why don't we hear more about this?”

Dani Rodrik, “Why don't we hear a lot more about SDRs”, Dani Rodrik's Weblog (3 February 2009).

http://rodrik.typepad.com/dani_rodriks_weblog/2009/02/why-dont-we-hear-a-lot-more-about-sdrs.html


The writer is professor of international political economy at Harvard's Kennedy School of Government.

Special Drawing Rights of the IMF are a faux world money used as a unit of account by international agencies and as a limited reserve asset by countries. It is neither a currency nor a claim on the IMF. However, in settlements among countries it is a potential claim on the freely usable currencies of IMF members under certain defined and restricted circumstances. Its value is defined by a basket of currencies consisting of the euro, Japanese yen, British pound sterling, and the U.S. dollar. A SDR today is valued at about $1.50.

Allocations of SDRs by the IMF provide its member-states with a costless asset on which interest is neither earned nor paid provided its holdings remain as initially allocated. If a country’s holdings rise, it earns interest; if its holdings fall, the country pays interest. Countries may voluntarily exchange SDRs or countries with strong external positions may be designated by the IMF to purchase SDRs from countries with weak external positions. In this way, international liquidity is increased.

New allocations of SDRs would add to the liquidity of global markets and, presumably, help in the immediate situation. But new allocations of SDRs are very difficult to approve. The first general allocation for SDR 9.3 billion was distributed in 1970-72 and a second for SDR 21.4 was distributed in 1979-81. In 1997 a special one-time allocation has been approved by the IMF Board of Governors and many IMF members but it awaits approval of the United States.

This points to major problems with this proposal. In the first place, allocations of SDRs require the approval of Fund members with 85 per cent of its total voting power. Given the weight of the U.S. in IMF decision-making, and the financial implications of new SDRs for the Federal budget, this effectively gives the U.S. Congress a veto on any issuance of SDRs. Second, when allocated, SDRs are distributed in accordance with IMF quotas, which means that the emerging and developing countries -- those most in need of additional liquidity -- would receive only small allocations. Moreover, allocations would go to those countries, such as the Sudan and Zimbabwe, currently under U.S. sanctions. Finally, while helpful in the short-term, additional global liquidity in the long-run could further aggravate the already extensive external imbalances that describe the world economy by postponing needed adjustment in those countries with wide trade deficits.

I for one am doubtful that any new SDR allocations will be approved at this time.