Tag: brad delong

The Old Infrastructure Excuse for Bigger Deficits

Washington Post columnist/blogger Ezra Klein recently echoed the latest White House rationale for additional “stimulus” spending for 2013-15 and postponing spending restraint (including sequestration) until after the 2014 elections. Klein argues for “a 10- or 12-year deficit reduction plan that includes a substantial infrastructure investment in the next two or three years.” In other words, a “deficit-reduction plan” that increases deficits until the next presidential election year.

Citing Larry Summers (who similarly promoted Obama’s 2009 stimulus plan while head of the National Economic Council) Klein says, “There’s a far better case right now for being an infrastructure hawk than a deficit hawk.”

“Deficit hawks tend to [worry that] … too much government borrowing can, in a healthy economy, begin to “crowd out” private borrowing. That means interest rates rise and the economy slows… That’s not happening right now. In real terms — which means after accounting for inflation — the U.S. government can borrow for five, seven or 10 years at less than nothing… . That’s extraordinary. It means markets are so nervous that they will literally pay us to keep their money safe for them.”

If low yields on Treasury and agency bonds simply reflected investor anxiety (unlike stock prices),  rather than quantitative easing, then why has the Federal Reserve been spending $85 billion a month buying Treasury and agency bonds? Despite those Fed efforts, Treasury bond yields have lately been moving up rather smartly – even on TIPS (inflation-protected securities). The yield on 10-year bonds rose by a half percentage point since early May. It is not credible to assume, as Summers does in a paper with Brad DeLong, that today’s yields would remain as low as they have been even in the face of substantially more federal borrowing for infrastructure. Even the Fed’s appetite for Treasury IOUs has limits. 

A second worry of deficit hawks, according to Klein and Summers, “is a moral concern about forcing our children to pay the bill for the things we bought… .These are real, worthwhile concerns. But in this economy, both make a stronger case for investing in infrastructure than paying down debt.”  Paying down debt?!  Nobody is talking about paying debt. That would require a budget surplus.  The debate is only about borrowing slightly less (sequestration) or substantially more (Obama).

The Summers-Klein argument for larger deficits is that interest rates are very low, so why not borrow billions more for a “substantial investment” in highways, bridges and airports?  Summers says, “just as you burden future generations when you accumulate debt, you also burden future generations when you defer maintenance.”  This might make sense if there was any link between government tangible assets and federal liabilities.  In reality, though, this smells like a red herring. Politicians always say they want to borrow more to build or rebuild highways and bridges.  But this is not how borrowed money is spent, particularly when it’s federal borrowing.

Accumulation of federal debt since 2008 − including the 2009 stimulus plan − had virtually nothing to do with investment. Nearly 90 percent of the  2009 “stimulus” was devoted to consumption – $430.7 billion in transfer payments to individuals, more than $300 billion in refundable tax credits, $18.4 billion in subsidies (e.g., solar and electric car lobbies), more pay and perks for government workers, etc. Stanford’s John Taylor shows that even the capital grants to states − ostensibly intended for infrastructure projects − were used to reduce state borrowing and increase transfer payments such as Medicaid.

In the National Income and Product Accounts (NIPA), the closest thing we have to a measure of “infrastructure” is government investment in structures.  Federal borrowing in the NIPA accounts rose from $493.5 billion in 2008 to $1,177.8  in 2010, yet total federal, state and local investment in structures was unchanged − $310.1 billion in 2008 and $309.3 billion in 2010. Such investment was lower by 2012, but not because federal borrowing was “only” $932.8 billion that year.  

NIPA accounts show only a $12.9 billion federal investment in nondefense structures in 2012 and $8.5 billion for defense structures. By contrast, transfer payments accounted for 61.7 percent of federal spending in 2012, consumption for 28.2 percent, interest 8.5 percent and subsidies 1.6 percent.   Consumption is mostly salaries and benefits. Transfer payments did include more than $607 billion in grants to states and localities in 2011, according to a new CBO study, but 81.7 percent of such grants were for health, income security and education, leaving only 10 percent for transportation. Transportation accounted only 3.2 percent of total federal spending in 2012 and nine percent of “discretionary” spending.

In short, direct federal infrastructure investment plus grants to states add up to only a little over $80 billion out of a budget that exceeds $3.5 trillion. If federal borrowing had anything to do with $80 billion a year in federal infrastructure spending, then we wouldn’t have been borrowing about a trillion a year for the past four years. 

Klein’s rephrasing of Summers’ rerun of the 2009 “infrastructure” excuse is not a plausible argument for increased federal debt. It is, at best, an argument for ending the chronic misuse of borrowed money to pay for transfer payments and government consumption so that we could prudently reallocate a greater share to transportation infrastructure.  


Imaginary Squabbles Part 4: Krugman and DeLong on the Top 1 Percent

In End This Depression Now! (pages 77-78) Paul Krugman offers the strangest arguments I have seen.   The story opens with familiar fulminations about the “top 1 percent” (those earning more than $366,623 in 2011).  As he put it in a 2011 column, “income inequality in America really is about oligarchs versus everyone else.”

“Incomes of the rich,” his book claims, “are at the heart of what has been happening to America’s economy and society.”  Yet it apparently requires great bravery to even dare to mention “the rising incomes” of the top 1 percent or top 0.1 percent:

Merely to raise the issue was to enter a political war zone: income distribution at the top is one of those areas where anyone who raises his head above the parapet will encounter fierce attacks from what amount to hired guns protecting the interests of the wealthy.  For example, a few years ago Thomas Piketty and Emmanuel Saez … found themselves under fire from Alan Reynolds of the Cato Institute, who has spent decades arguing that inequality hasn’t really increased; every time one of his arguments is thoroughly debunked, he pops up with another.

To be called a “hired gun” of the wealthy might be insulting if it was not so ridiculous.  First of all, no employer has ever tried to influence what I write.  Second, I have been a very successful investor and live quite comfortably from realized capital gains plus mandatory distributions from IRA, Keogh and 403(b) accounts that President Obama would regard as much too large.  I negotiated a token salary from Cato (smaller than my Social Security check) but return at least 40 percent of it as a charitable donation.  I am usually in the top 1 percent, at least when stocks are up, and thus not easily bribed.  I would be flabbergasted if Krugman is not also a member of that demonized bunch of oligarchs.

Krugman complains that some of my arguments changed (new ones popped up) over decades, but arguments should change after decades of new data.  I must have made a couple of mistakes since 1992, but mistakes (including Krugman’s) are not evidence of deliberate deception or corruption.

Imaginary Squabbles Part 3: Krugman and DeLong’s Changing Theories and Missing Facts

Responding to a student question after a recent Kansas State debate with Brad DeLong I posed a conceptual puzzle.  I asked students to ponder why textbooks treat Treasury sales of government bonds as a “stimulus” to demand (nominal GDP) in the same sense as Federal Reserve purchases of such bonds.  “Those are very different polices,” I noted; “Why should they have the same effect?”  

The remark was intended to encourage students to probe more deeply into what such metaphors as “stimulating” or “jump starting” really mean, not to accept as dogma that fiscal and monetary policy are equally effective or that economists are certain just how they work.

DeLong’s misinterpretation of my question led him to lecture me that, “if you really do think that monetary expansion undoes fiscal expansion because monetary expansion buys bonds and fiscal expansion sells bonds, you need to educate yourself.” Citing that wholly imaginary rewriting of my question, Paul Krugman wrote, “My heart goes out to Brad DeLong, who debated Alan Reynolds and discovered that his opponent really doesn’t understand at all how either fiscal or monetary policy work.”

Did I really say that “monetary expansion undoes fiscal expansion”?  Of course not.  If that had been my question, I would have answered myself by saying that piling more debt on the backs of taxpayers is unlikely to stimulate private spending (much less encourage more or better labor and capital) unless the added debt is “monetized” by the Fed and regulators allow banks to lend more to private borrowers.  DeLong made much the same point by saying, “Expansionary monetary policy makes it a sure thing that expansionary fiscal policy is effective by removing the channels for interest-rate and tax crowding out.” 

The Fed’s current bond-buying spree is bound to have some effect, if only to facilitate cheap corporate buybacks of shares and speculative day trading of such stocks on margin.   But selling more government bonds per se (if the Fed won’t buy more) would be just as much an added burden for taxpayers as it would be a benefit to whoever receives the resulting government transfers, contracts or subsidies. 

This make-believe squabble about monetary expansion undoing fiscal expansion exists only in DeLong’s imagination, like my non-prediction of mammoth inflation or Krugman’s non-facts about Ireland’s fiscal frugality.

Memo to Robert Reich: Rewrite Your Brief

Robert Reich posted a letter in June 20 Wall Street Journal responding to my article of June 16, “Why 70% Tax Rates Won’t Work.”

He argues that I distort his proposal (though I wasn’t talking about his proposal) and ignore his argument that, “Giving the middle class more purchasing power by lowering its rates while raising the rates at the top will help spur [economic] growth.”

This strikes me as a futile effort to change the subject.  Since I proved that past tax rates of 50-70% on relatively modest incomes raised less revenue than a top tax rate of 28%, how could Reich’s proposal of 50-70% rates at incomes above $500,000 raise more revenue?   And if 50-70% tax rates would not raise more revenue, then how could he possibly promise “substantial rate reductions [actually a refundable tax credit] for people with incomes under $100,000”?  

The original draft of my article was not focused on Reich, but included others − including two of his Berkeley colleagues (Brad DeLong and Emmanuel Saez) who recently suggested a tax rate of 70% would be “revenue-maximizing.”  The details of Reich’s proposal were not in the blog I quoted, but such details have no relevance to any points I made.

Only after top tax rates came down, I noted, were we able to afford very substantial reductions in taxes for people with incomes under $100,000.  Since President Reagan took office the average income tax rates have become negative for the bottom 40% and were cut in half for the “middle class.”   In 1980, when top tax rates were 70% and nearly 40% on capital gains, such rates brought in so little revenue that the Feds were compelled to tax low and middle-income families quite heavily to bring revenues up to the normal 8% of GDP.

At his blog, Reich argues that, “Reynolds bends the facts to make his case. The most important variable explaining the rise and fall of tax revenues as a percent of GDP has been the business cycle, not the effective tax rate. In periods when the economy is growing briskly, tax revenues have risen as a percent of GDP, regardless of effective rates; in downturns, revenues have fallen.”

For that to work as an explanation of why individual tax revenues were higher when the top tax rate was 28% than when it was 70-91%, Reich is logically obligated to argue that the economy was growing more briskly when the top tax rate was 28% than when the top tax rate was 70-91%.  Contradicting his own logic, however, Reich instead claims that “Giving the middle class more purchasing power by lowering its rates while raising the rates at the top will help spur growth.”

Reich is not proposing to add new tax rates to 50-70% on salaries, dividends and capital gains because he believes it will raise more revenue (my data show otherwise), but because he believes it will raise the growth of real GDP.   This is breathtaking. Reich should be glad that I ignored his “central argument” about super-high tax rates boosting economic growth by taking income from those who earned and giving it to those more likely to squander it.   I was just being too polite.

Within his hyper-Keynesian lawyer’s brief, Reich is logically required to argue that top tax rates of 70-91% (1) raised revenue, and that (2) this imaginary added revenue allowed imaginary tax reductions on poorer people with a lower propensity to save.  He must then arrive at the logical conclusion, which is that (3) the average savings rate must have been much lower when top tax rates were 70-91% than since 1988 when to tax rates have frequently been 28-35% and as low as 15% on capital gains and dividends. A low savings rate, in Reichian theory, is what makes the economy grow.

My article proved the first two premises are false.  High statutory tax rates on the rich generated less revenue, and the poor and middle classes paid much higher taxes as a result.

The third premise of Reich’s brief is key to the Keynesian fable about growth depending to incentives to consume rather than incentives to produce.  Once again, the facts are the exact opposite of what Reich imagines. The personal savings rate was 9% from 1959 to 1981 when top tax rates were 70-91%, and 4.5% from 1988 to 2007 when top tax rates were 28-39.6%.

Reich’s comment that “the richest 1% of Americans got 10% of total [pretax, pretransfer] income in 1980, and get more than 20% now” refers to income reported on individual tax returns, assembled by Thomas Piketty and Emmanuel Saez.   When top tax rates went way down, particularly in 1988, 1997 and 2003, the amount of reported income and capital gains went way up.  As Saez explained in the 2004 issue of Tax Policy and The Economy (MIT Press, p.120): “Top income shares … show striking evidence of large and immediate responses to the tax cuts of 1980s, and the size of those responses is largest for the topmost income groups.”   That is why revenues from high-income households went way up rather than down, and why it then became feasible to hand out refundable credits to the bottom 40% and cut tax bills in half for those earning less than $100,000.

Reich would apply his 50-70 % tax rates to reported capital gains and dividends, which is a surefire way to make taxable capital gains and dividends vanish from tax returns.  No high-income taxpayer can be compelled to sell property or financial assets for the sheer joy of paying 50-70 % of the gain to the IRS.  No investor can be compelled to hold dividend-paying stock rather than tax-free bonds.  

With the enormous amount of revenues lost under the Reich tax proposal, we would have no choice but to revert to the pre-1986 stingy personal exemptions and standard deductions while also repealing the Bush child credit and the vastly expanded earned income tax credit.

Why Are Statists so Sensitive About Cuba?

I touched a raw nerve with my post about Fidel Castro admitting that the Cuban model is a failure. Matthew Yglesias and Brad DeLong both attacked me. DeLong’s post was nothing more than a link to the Yglesias post with a snarky comment about “why can’t we have better think tanks?” Yglesias, to his credit, tried to explain his objections.

This leads Daniel Mitchell to post the following chart which he deems “a good illustration of the human cost of excessive government.”…this mostly illustrates the difficulty of having a rational conversation with Cato Institute employees about economic policy in the developed world. Cuba is poor, but it’s much richer than Somalia. Is Somalia’s poor performance an illustration of the human costs of inadequate taxation? Or maybe we can act like reasonable people and note that these illustrations of the cost of Communist dictatorship and anarchy have little bearing on the optimal location on the Korea-Sweden axis of mixed economies?

I’m actually not sure what argument Yglesias is making, but I think he assumed I was focusing only on fiscal policy when I commented about Cuba’s failure being “a good illustration of the human cost of excessive government.” At least I think this is what he means, because he then tries to use Somalia as an example of limited government, solely because the government there is so dysfunctional that it is unable to maintain a working tax system.

Regardless of what he’s really trying to say, my post was about the consequences of excessive government, not just the consequences of excessive government spending. I’m not a fan of high taxes and wasteful spending, to be sure, but fiscal policy is only one of many policies that influence economic performance. Indeed, according to both Economic Freedom of the World and Index of Economic Freedom, taxes and spending are only 20 percent of a nation’s grade. So nations such as Sweden and Denmark are ranked very high because the adverse impact of their fiscal policies is more than offset by their very laissez-faire policies in just about all other areas. Likewise, many nations in the developing world have modest fiscal burdens, but their overall scores are low because they get poor grades on variables such as monetary policy, regulation, trade, rule of law, and property rights. This video has more details.

So, yes, Cuba is an example of “the human cost of excessive government.” And so is Somalia.

Sweden and Denmark, meanwhile, are both good and bad examples. Optimists can cite them as great examples of the benefits of laissez-faire markets. Pessimists can cite them as unfortunate examples of bloated public sectors.

P.S. Castro has since tried to recant, claiming he was misquoted. He’s finding out, though, that it’s not easy putting toothpaste back in the tube.

Big Business Not Investing

In a recent post, I argued that while third-quarter GDP was positive, the underlying data revealed that U.S. private investment was still in the toilet. While government spending might be providing a short-term “sugar high” for the economy, U.S. business investment remains in recession. I speculated that Obama’s anti-business agenda is likely one cause of the problem.

For those observations, economist Brad DeLong called me an “utter fool.”

Let me draw your attention to an article in the Washington Post today entitled “Corporate giants sit on piles of cash.” Nucor Steel is sitting on piles of cash that it is unwilling to invest. Nucor’s chief executive Daniel Dimicco explains:

Everything is still on hold because we don’t have a lot of confidence that the right things are being done in Washington to reinvigorate the economy.

To story goes on:

Nucor isn’t alone. The balance sheets of large U.S. corporations are for the most part in good shape. Many big companies have piles of cash on hand and credit markets have thawed so that they can raise new funds… But most U.S. executives lack enough confidence in the economy to expand their businesses.

The article explains how big businesses are “jittery” for various reasons, such as memories of last year’s credit crunch. It doesn’t mention President Obama’s policies, but at this point in the economic cycle when world growth is returning, the lack of excitement by U.S. businesses regarding domestic investment is very curious.

Unfortunately, the Obama administration is giving them nothing to get excited about. The President is promising them higher health care costs, higher corporate taxes, more labor regulations, higher energy costs with cap-and-trade, and a lack of interest in further trade agreements.

The Post article says that some U.S. multinationals are using their hoards of cash to invest abroad, allowing them to avoid punitive treatment under the high-rate U.S. corporate income tax.

How do we get U.S. multinationals to start investing their “piles of cash” in the United States? Cut the U.S. corporate rate permanently to 15 percent, as I’ve described in Global Tax Revolution. With just about every other advanced economy having slashed their corporate rate in recent years, we are “utter fools” for not following suit, especially with the unemployment rate now topping 10 percent.