Tuesday, July 24, 2012

Six policies from NPR

"Six policies economists love (and politicians hate)" From NPRs Planet Money

The Planet Money team got together a group of economists from widely differing political backgrounds, and came up with this very nice list of policies the economists all agreed on--which are all regarded as hopeless in the standard political debate.
  1. Eliminate the mortgage tax deduction.
  2. End the tax deduction companies get for providing health-care to employees.
  3. Eliminate the corporate income tax. Completely.
  4. Eliminate all income and payroll taxes. ... Instead, impose a consumption tax.
  5. Tax carbon emissions. 
  6. Legalize marijuana.
It is often perceived that economists don't agree on anything, or that economists are pretty much just like everyone else in the spectrum of their policy views -- that economics training really has no clarifying effect on one's worldview. This list is a nice counterexample. We could probably safely add eliminating all agricultural subsidies and free trade.

(I quoted the proposals as above. In fact, the health tax exemption applies to individuals, and it's for employer-provided group health insurance, not care.  Hat tip, I found the NPR story in a nice post on econlog)


  1. What about opium and Kokanee. I thought we agreed on this before. Are they backsliding. Stand your ground.

  2. They missed a great opportunity to mention Bryan Caplan's Myth of the Rational Voter. Maybe next time.

    1. Kaplan has some great work on our corrupting education system. I love his stuff. One of the few who isn't afraid to cause a stir. Koodoes to Kaplan

  3. Is a generic tax-deferred account equivalent to a consumption tax?

    (Imagine that the IRS would let you tag any bank or brokerage account as a "TD Account". Deposits reduce your taxable income, withdrawals count as taxable income.)

  4. Presumably the loss of revenue from the end of the corporate income tax would be compensated for by taxing capital gains (after adjusting for inflation) and dividends as ordinary income, right?

    I don't know why we don't do this in the first place. The ridiculous structure of corporate taxation means untold billions of dollars sit offshore in passive securities, because it can't be repatriated without triggering massive tax liabilities at the corporate level.

    1. "I don't know why" this comming from an economist???
      Rational expectations implies Conspiracy.

  5. I wonder who will have to mark to market their views on Greece and the Euro so that we have 7 points on which economists agree?

    Fed Watch: Is There Even a Panic Button in Europe?


  6. As an academic economist, I say:

    1) yup
    2) yup
    3) yup
    4) don't know - outside my area
    5) yup - although nobody knows what the rate should be
    6) not so clear. marijuana use has an externality: kids start using drugs because their peers do and the peers make it seem cool. So one teenager smoking pot causes others to smoke pot as well. Since teenagers are too stupid to make their own decisions, smoking marijuana has a negative externality on others.

    eliminate ag subsidies) yup
    free trade) yup

  7. Since when was there an economic consensus that all income taxes should be replaced with consumption taxes? I could agree with all those policies, save eliminating all income taxes. Surely most economists would argue for a greater proportion of consumption taxes, but all?

  8. When we talk about legalizing marijuana, are we not talking about legalizing them like cigarettes are legal? i.e. it will still be "off limits" to minors.

    Of course as I recall as a minor it would have been easier for me to get marijuana than cigarettes since my parents didn't smoke. I think the peer effect is already about as maximal as it can be right now.

  9. Breaking news!!! Number 8, well it has just now been born.

    Iinflation now, especially if we also did as Minsky suggested and remove COLAs from social security and gov't pensions, is what we need.


    That leaves Nos. 9 and 10

    When will economists agree?

    9. That there are no structural barriers to rapid transitions in the economy as show post WWII, so stimulus will work?

    10. There is a "Laffer" curve to the multipliers of gov't spending. When unemployment is low, the multipliers are low; however, when unemployment is high, the multipliers are very high.

  10. Last, and this is too much to hope for, is the elusive number 11, that gov't borrowing doesn't crowd out investment. In other words, my saving today is not required for your making an investment tomorrow.

    Understanding this requires a degree of critical thinking beyond the capacity of many. On must come to the realization that bank lending is just a more efficient way of accomplishing what otherwise would be done with contracts of future performance.

    As I explained this recently with a this true story about how the great pyramids were built.

    We are in Egypt 3500 years ago, before the building of the great pyramids. There are lots of people who sit around all day, bored, with nothing to do, for there are not enough camels to travel north to see the Sea or south to see the Falls.

    One day, the Don Trump of the era, gets an idea. I will build a Great Pyramid across the river and a barge line. On weekends, people from Cairo can come over on the barge, let the kids run around in the petting zoo with the Lions and Tigers and climb to the top for a great view. My aunt will have a stand and sell them sandwiches.

    Now, there were Austrians, even then, who said, why you can't do that, you have no capital. We have no banks or capital or savings of any kind. We don't even have camels on which to go to the Beach.

    Trump the First says, not to worry, we have clay tablets. I am an honorable honest man and I have always kept my promises. On clay tablets I will promise to pay for the worker and supplies we need, in the future, out of the profits we earn from admissions.

    And, to make my promise more secure, well we shall go down to the Temple and get the Priest to come up with a new rule from God that, if the clay tablet is delivered on Tuesday, between 11 and 2, when the sun is out, with a proper seal, and I don't keep my promise, then there will be seven lashes for me and dark days in my family for seven years.

    And, so, Trump the first got all his new creditors together, the next Tuesday, and handed out his clay tablets. He gave his tablets to the leather shop and the baker, and grain merchant and the iron monger. To make everyone feel safer he told the assembled crowd, "Boys, not to worry, you are in the Syndicate now." We always wear yellow Polo Shirts with a little horse. An older member of the Syndicate asked, Don, I have a camel, found him on the loose one night, and I want to retire to the beach. My son is going to take over my belt making shop. How does he become a part of the Syndicate? Don smiled, well just give him your clay tablet and have him bring it to the next meeting of the Syndicate. Of course, everyone realized this meant that they could start trading clay tablets.

    The end of the story is told by Michael Lewis in The Big Short.

    Now, the clay tablets I described were no different in economic effect than the feared fractional reserve lending. As a matter of substantive economics, there is no such thing as fractional reserve lending. There are merely contracts with promises of future performance. Banking is nothing but a means or method to make the process of future contracting more efficient, as Brad Delong explained very recently in his comments about gold coins with pictures of bearded men.

    1. One must realize that bank lending ....more efficient". Certainly so. One must realize that bank lending is counterfeiting. Nuff sed.

    2. Which is more important a great edifice to one man or destroying the lives and potential of an entire population.
      What you see as good I see as evil.
      I'm an Austrian

    3. Should people repay their counterfeit "loans" I think it was the Great Oz who said 2005 "just forgive them" if there is no investment there is no debt.
      Did you see the backboard in the emerald palace ? I defiantly would never challenge the great Oz to a game of half court one on one.

  11. No. 12, so that we have a dirty dozen?

    And, then the final, illusive no. 12. There is no such thing as either the tooth fairy or the ricardian equivalence my friends.

    What economists do not understand who do not see this truth is that they do not understand is that, while life is real, reality is also, paradoxically an illusion that resides entirely in the minds of humankind and this is where the real economy resides.

    People, and I do this took, talk about the real world in economics, but that is a metaphor.

    In the true real world, there is no economy. The economy takes place wholly and entirely in our minds and consists almost entirely of our future expectations. The purpose of all gov't policy is to manipulate those expectations, the prime goal being to create confidence in today and tomorrow, that future promises will be kept.

    Life, my friends, is a game much harder than the child's play of grumpy economists.

    Thus, truth 13 is that economics is a confidence game, as much as leading a great army into battle is a confidence game. There are no "rules" that will guide one, for, as Soros teaches, all rules will be gamed. There are just moves in an unending game, with many of the moves being path dependent. Every once in a while a Don Trump comes along with a new idea, but it is a game with no rules.

    My friends, do a simple thought experiment. Have a war game in which you have two armies. Army A is lead by two rules guys, John Taylor and John Cochrane. Army B is lead by a dude named Henry, an army which is lead by what he says to his Army:

    From this day to the ending of the world,
    But we in it shall be remembered-
    We few, we happy few, we band of brothers;
    For he to-day that sheds his blood with me
    Shall be my brother; be he ne'er so vile,
    This day shall gentle his condition;
    And gentlemen in England now-a-bed
    Shall think themselves accurs'd they were not here,
    And hold their manhoods cheap whiles any speaks
    That fought with us upon Saint Crispin's day.

    We know who wins the battle. Henry, who understands that rules are not ends in themselves but a means to an end, having an Army with confidence. Patton was merciless in enforcing rules, but to an end, so that his soldiers feared him more than the enemy.

    John may be a bright fellow, but he has never read his Shakespeare or thought seriously about human nature. But down your Cochrane and take up Thinking, Fast and Slow or Influence.

    In sum, because economists don't know how to play the game, their agreements all are at the end meaningless (none can pass,politically).

    My friends. Here is the truth. The Great Men theory is true. Man must be ruled through leaders who lead through the strength of their convictions and by force of their personality. John and his rules are bureaucrats, whom he admits cannot lead.

    There are times to print money. This is such a time. We should be doing lots of other things, but right now, now is the time to print money.

    But, without leadership, even printing money will fail

  12. 1 - yes
    2 - no, (unless single payer gets introduced at the same time)
    3 - no, taxes need to be spread over the economy and to avoid run away concentration of wealth
    4 - no, same as for corporate taxes
    5 - yes
    6 - no,

    Yes to ending agricultural subsidies. Free trade - was yes but not so sure any more in the face of Chinese economic policies.

  13. Edward C. PrescottJuly 25, 2012 at 8:13 PM

    The list is mostly good, but there are two misguided recommendation and one keyu one missing.
    1. All respectable economist agree that to eliminate the deducttability of home interest rate wouould be double taxation. Those issuing the mortages are subject to taxation. Owner used real estate id subject to a huge effectice sales tax rate of about 40%. This is the property tax rate. Why penalize home ownership?

    2. The deductibility of sate an local taxes is a good reform. Why should lower income people in lower income states subsidize the higher income people in high income states such as CT, NY, and CA?

    3. Why tax the use of auto transportation. which has huge positive externalities. The carbon tax is a bad tax.

    Edward C. Prescott

    1. I've learned to listen hard when Ed is talking. He's always thinking out of the box..

      Help us out a bit Ed. On mortgage interest, would you be happier if the capital tax rate, and hence the rate on interest income to mortgage issuers, were zero? Also, don't rental properties pay the same property tax, so on the big own/rent decision it isn't a margin? I grant housing vs. other goods shouldn't be distorted, but if the property tax is a tax on land value are you ok with it?

      Also help me explain to my liberal friends the positive externalities of auto transport.

    2. 1. It seems to me that double taxation on real estate would be the goal of Austrians, who fear what makes mortgage deductions possible: fractional reserve lending.

      2. I assume that when you say you favor "Eliminat[ing] the mortgage tax deduction" this includes all commercial loans, including loans for business purposes or to finance other investments.

      If not, as applied, the law would be a boondoggle, for there would be so many loopholes for evasion of the ban.

      3. Given the negative wealth effect of eliminating the mortgage deduction, to what rate of inflation do you believe the fed should raise its target?

      All our existing mortgages have to be paid, somehow.

      BTW, I support eliminating the tax subsidy of deducting any private interest of any kind. We have too much private debt and we ought to be discouraging its creation and working to return private debt to a safety and soundness based range, based on the work of Keen, Minsky, Stiglitz etc.

      4. Prof. Prescott, given that we are so often reminded that 49% of our population doesn't pay federal income tax, where is the discrimination you conjecture?

      And, the "victims" of this discrimination could move to higher tax states.

      Also, this discrimination would be ended by a VAT in lieu of an income tax (which I support). Would you favor a VAT so as to eliminate all the similar argued discriminations in the income tax code?

      5. And, Prof. Prescott, given you concern for discrimination and subsidy, what didn't you first mention the true discrimination in our federal income tax system at present. Highly productive people in our high income states (CA, Ill, MN, and NY) pay high federal taxes that are re-distributed through federal transfer payments to low productivity, low income states (KY, TN, Miss, SC, etc.) where they pay high wages (e.g., hospitals and doctors), substantially out of line with the true productivity of the communities in which they work.

      6. Until we have price stability in oil, shouldn't we have the good sense to listen to the American public and not raise oil prices further with new taxes? IOW, chicken and egg problem: first energy independence and price stability, then carbon taxes. I assume we have some agreement on Stock and Watson (2012)?

    3. To the extent property taxes pay for current property related services (sewer, water, roads, fire departments)they are a cost recovery and not a tax in the ordinary sense.

      Mortgages are probably mostly financed with money from tax exempt entities like pension funds, IRA's and charitable foundations so the interest that flows through to them is not being taxed.

    4. Mr Prescott,

      I'm not sure I follow your logic on 2, many poorer states like Alabama and Missippi are getting positive net transfer dollars from the federal government (that means from states like those you mentioned and even Texas or sadly Nevada). Refunding to those kinds of poor states furthers their reliance on other states.

      On the other end wouldn't we be begging states to come up with new taxes so that they could restore their net losses to the federal government?

    5. I had not really thought about the issue Prescott raises. It is generally true that the tax code tries to acheive symmetry between deductions and income. What is taxable to someone is generally deductible by the payor. We generally take it granted today that any expenditure that is not a "ordinary and necessary business expense" is not deductible.

      Perhaps I'm missing some aspect of the argument; however, I would think the logical extension of Prescott's argument is that *any* interest I pay should be deductible, whether it be for buying a home, a car, or to finance a vacation. Why not allow me to deduct the amount I pay for groceries, a movie ticket, etc? The amounts I pay are income to the recipients. I wonder, really, if Prescott isn't simply arguing for the abolition of the income tax in favor of a consumption tax?

      There is, and never has been, a consistent economic logic to the tax code. To quote Holmes, the life of the law has not been logic, but experience.

  14. I don't own a car because
    1 it costs too much
    2 the police are always using cars to fill their quota of catch the bad guys. If you own a car they automatically think you are bad

  15. We people under 50 don't own homes because nobody is able to have the same job for more than 3-5 years. There are just so many people now days that we have become disposable. Employers don't want to make that kind of commitment. Insurance. Parole taxes. Etc. now days it is the temp services who employ people. There are a lot of problems with this model. Thus young people are forced to live their entire lives in other peoples homes. The idea of home does not exist except for GRANDMAS home. Because this is a homeless nation. China has homes. USA doesn't.

  16. Another thought on Prescott's comment:

    Perhaps what Prescott is getting at is that we should allow mortgage interest to be deducted (as opposed to other types of personal interest expense) because home ownership is (over-?) taxed in other ways. The reason I surmise this is because he specifically mentions the real estate property tax.

    But, what we are presumably talking about here is federal income tax policy.

    But, two questions about this:

    1. Doesn't federal income tax policy mitigate this by a) allowing a deduction of real property taxes when other types of taxes (e.g. excise taxes) are not deductible; and 2) largely eliminating the capital gains tax on the sale of primary residences (up to $500K per married couple)?

    2. If, indeed, the decision of state and local governments to impose a real property income tax is misguided, why should it be the responsibility of the *federal* government to mitigate this allegedly bad policy by allowing a deduction of mortgage interest (as opposed to other types of personal interest expense?)

  17. I noticed Planet Money will not revisit a podcast from 2010 when economist Tyler Cowen made his predictions. Now that he was proven wrong. The liberal slanting Planet Money says nothing.


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