Tuesday, November 13, 2012

Bloomberg TV interview

A short interview with Bloomberg TV's Betty Liu on the fiscal cliff.  No big news for readers of this blog, but maybe fun anyway.

We were just getting going when it ended. I was ready to say, if you didn't buy stimulus from spending increases, you shouldn't fear lack of stimulus from spending reductions; all government (federal, state, local) and all taxes matter; you need to include taxes and benefits, and then see the huge marginal taxes faced by poor people, and how cutting subsidies that go to rich people counts in the distributional calculus;the growth of regulation and tax chaos matters more than tax rates, Europe just showed us what happens when you try to balance the budget with sharp hikes in marginal rates....Next time.


  1. I'm afraid I don't get it. How much I get to keep depends on the relative impacts of changes in tax rates and deductions. If the rate decrease gives me $100 but losing my deductions costs me $200 how am I better off?

    1. (from October 5th) ...

      John H. Cochrane October 5, 2012 8:17 AM

      Thanks for asking! This is the most important point. In economics "how much money you have in your pocket" is really a secondary question to the overall economy (I know it matters to you!)
      What matters is, if you (say) work an extra day, how much more money do you get to keep? If you get paid $100 per day, but the government takes half, then you keep $50. If it takes a third, then you keep $66, and are more likely to work that extra day rather than go home and watch the ball game. A revenue-neutral tax reform lowers this marginal rate, but eliminates deductions so you end up paying the same amount overall.
      Why not "put more money in your pocket?" reduce the rate and let you keep the deduction? Yes, that would be even better. But the government is broke and needs the money.
      Why does putting money in your pocket not really affect the economy overall? Because mostly the government takes your money and gives it to someone else to spend. You spend more, he or she spends less. You like it, but it's not much difference overall.
      Margins matter to economics.

  2. @ JB McMunn - Remember, taxes aren't just bad because they take your money. They're also bad because they mess up your incentives. In the case you describe, you're obviously not any "better off" in the sense that you have fewer dollars than you did before the change. However, your incentives to work are less distorted by high marginal tax rates. The economy is also better off because instead of your decisions (about what health insurance to buy, what kind of home to buy, etc) won't be distorted by government subsidies.

    So, the trick is to make sure that the distributional consequences of tax reform are fair. One way to do that is with, for example, a $50,000 cap on itemized deductions. This would raise $750 B over a decade, with 80% of that money coming from the top 1%. Of course, that's probably with a massive, politically unpalatable limitation on the deduction for charitable giving, but you get the point. The rich enjoy a lot of those deductions, so there's SOME low-hanging fruit in the tax code that congress can look to to raise revenue in a less-harmful way.

  3. why don't you use that mass media platform to step into the big "L" mode? you are never going to free minds with a flat tax argument b/c perversely it's seen as regressive in a statist mind. I know b/c i had one growing up watching Friedman and Forbes but didn't pass through that statist portal until Uncle Ron got on the stage and said 0-0-0.

  4. Should we be behind capping deductions? It sounds good, and lowering rates is good, but I just can't get over the dead weight loss related to the length of the code. If we cap all the existing deductions, don't we make the damn thing more complicated or is the idea to not cap deduction by deduction but cap aggregate deduction? I guess I could get behind a, remove all credits, cap all deductions at x,000 ... everyone feel free to pick from this big long menu style reform. If we're arguing though for progressiveness AND growth, is there any disagreement that the complications in the code benefit the wealthy who can hire fancy tax accountants / lawyers at the expense of the poor who can't AND result in wasted resources and time (not to mention distortions)? Should economists (being that we know we won't get all logical changes) focus on simplicity above all else (notably our desire for lower rates)?


    1. I agree. Get rid of them all, permanently, so the code is simpler, the government raises revenue at the lowest possible marginal rate, the tax lawyers can find gainful employment, and so we don't enter an inevitable annual bickering about changing the cutoff, or each interest group lobbying to raise the cutoff for their pet exemption.

    2. LOL! I guess you posted this while I was composing my rant, which ended with the same conclusion. As usual, you said it better with 10% as many words.

    3. They are just going to creep right back in. Consider why they are there to begin with. We do have democracy and lobbying is legal. Do you think it's mathematically probable to have a tax code with no deductions under such a system? show me one democracy that has a simple tax code

    4. Anonymous is correct. I view all income tax reform as a losing game. I have seen it all before, sure tax rates come down for a while. Deductions are removed, then the rates go back up, people scream, and some deductions go back in.

      Only by repealing the income tax amendment can we ever be free of this harmful cycle. The government should be run on excise taxes alone.

  5. I understand about the margins but I'm going to have carefully consider your reasoning over the next couple of days and maybe get back with more questions.

    I think people are self-optimizing machines who are constantly working at the margin to balance time, energy, and assets to best achieve their goals. When you fool around with the parameters they have to readjust, which consumes (wastes) time, energy and resources.

    I've seen it in my own career. I am a physician. When I was in academics and working on a straight salary I was out the door at the end of the day as early as possible. If you can't increase your income at least you can maximize your free time. In private practice if someone asks me to work a patient in at the end of the day - absolutely!

    I have had to re-jigger my practice over and over again for the past 20+ years. HMOs, PPOs, preauthorization, ERISA, Stark laws - all have caused major disruptions and we have had to put a lot of time, energy and resources into adapting. I am solo and now require 7 employees to run my practice. I started with two. It takes 4 people to deal with billing and insurance.

    A current example: At present they are trying to corral everyone into using electronic medical records (EMR). Initiating an EMR in a typical practice costs tens of thousands of dollars and cuts productivity about 20% for about 6 months. The carrot is bonuses for using using EMR for now, but the stick is that anyone not using it will start seeing a cut in fees from Medicare in the next few years.

    Note that doctors are not adopting EMR because they looked at it and said, "I have to have this!" They did not see any utility because EMR is really not ready for prime time. They have been coerced into it and most of them hate it. They are now the world's most expensive data entry operators. Some have actually hired "scribes" to handle the EMR so they can focus on the patient. At the margin, you now pay $10/hr to a scribe to be relieved of the burden of EMR.

    In contrast, when pulse oximeters came on the market no one had to force us to adopt them. The usefulness was so compelling that it quickly became a standard of care with no government inducement or coercion. Same for noninvasive BP devices. These things cost thousands of dollars when first on the market but we gladly adopted them. They made practicing easier and safer.

    So to wrap it all up, I'd like to see a very small government that didn't provide incentives or disincentives in any way, shape or form. These things just induce market distortions and often result in the government picking winners and losers depending on who could purchase the most political pressure.

    Let people self-optimize and stop knocking them off balance with ever-changing deductions and other incentives.

  6. Replies
    1. Hair was good, but he always smiles too much on TV. Could look more relaxed and natural.

    2. Beats this guy: http://www.youtube.com/watch?v=G8ZHYhKV0Wo.

    3. Oh common. He looks professorial. Besides, if he didn't smile or appear amicable, people would think they were right and that all Chicago economists are mean-spirited Republicans that hate poor people.

      And, Betty Liu is hawt.

  7. “Margins matter to economics.”

    Democrats, Progressives, the academy, the media and the public categorically reject this notion. They believe that margins and incentives are meaningless, and all that matters — to individuals, the government and the economy — is “money in your pocket.”

    “Margins matters to economics” has become synonymous with “tax cuts for millionaires.” And that's always a loosing political argument, as Republicans discovered on November 6th.

    Republicans should let tax rates rise to whatever level Democrats wish. If Republicans were right, then the economy will tank and accountability will be clear. But if Republicans fight to a “compromise,” we'll be faced with another four years of slow growth and another election where the average voter won't be to tell the difference between the parties.

  8. I think the last Anonymous (6:28 PM) has a point. The rhetoric of margins is wrong because it does not resonate in common people and politicians alike. You have to educate them to the level when they are able to grasp the rhetoric of modern economics. The alternative is to change the rhetoric.

    What matters ultimately is the ability to make choices. Redistribution achieves this for the masses of common people. You can't win here. Not until you introduce dynamics. Yes, margins are a metonym for dynamics. But they are not the only possible metonym.

  9. You are assuming in your analysis that the left tail of high rates and inability to roll over debt is a higher probability and/or a more dangerous scenario than the opposite tail: namely that we will have prolonged deflation and extremely low rates with no economic growth for 20 years, like Japan. If we lock in a 3-4% borrowing cost and end up in that scenario, we will face a crushing debt burden in real terms. I am not sure there is any reason to fear the high rates/high inflation scenario more than the opposite, unless of course you are making a forecast that it is more likely.


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