The Times on Taxes

The New York Times' Sunday lead editorial (12/30) is simply breathtaking. The title is "Why the economy needs tax reform." It starts well,

Over the next four years, tax reform, done right, could be a cure for much of what ails the economy...

OK, say I, the sun is out, the birds are chirping, my coffee is hot, and for once I'm going to read a sensible editorial from the Times, pointing out what we all agree on, that our tax system is horrendously chaotic, corrupt, and badly in need of reform. Let's go -- lower marginal rates, broaden the base, simplify the code.

That mood lasts all of one sentence.

Higher taxes,...

Words matter. "Reform" twice, followed by paragraphs of "higher taxes," with no actual "reform" in sight. The Times is embarking on an Orwellian mission to appropriate the word "reform" to mean "higher taxes" not "fix the system."

Let's be specific. What is the Times' idea of tax "reform?"

Benefits trap art

Two charts from the UK, admittedly sprayed with too much chartjunk, but illustrating the poverty trap in Britain. (A previous post  on high marginal tax rates for low income people has more charts like this.)

Most of UK benefits are not time-limited, so people get stuck for life, and then for generations.

Fiscal cliff or fiscal molehill?

Four thoughts, reflecting my frustrations with the "fiscal cliff" debate. 

1. Recession

How terrible will it be if we go over the cliff?

Bad, but for all the wrong reasons. If you, like me, didn't think that "stimulus" from government spending raised GDP in the recession, you can't complain that less government spending will cause a new recession now. The CBO's projections of recession are entirely Keynesian. Pay them heed if you still think the key to prosperity is for the government to borrow money and blow it.

The Fed's great experiment

So now you have it. QE4. The Fed will buy $85 billion of long term government bonds and mortgage backed securities, printing $85 billion per month of new money (reserves, really) to do it. That's $1 trillion a year, about the same size as the entire Federal deficit. It's substantially more each year than the much maligned $800 billion "stimulus." Graph to the left purloined from John Taylor to dramatize the situation.

In addition, the Fed's open market committee promises to

"..keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored." [Whatever "anchored" means.] 

This is a grand experiment indeed. We will test a few theories.

ECB dilemma

It was announced yesterday that  Europe will have a new, central bank supervisor run by the ECB, much as our Fed combines monetary policy and bank supervision. Be careful what you wish for, you just might get it.

One big unified central agency always sounds like a good idea until you think harder about it. This one faces an intractable dilemma.

Here's the problem. Why not just let Greece default?" is usually answered with "because then all the banks fail and Greece goes even further down the toilet." (And Spain, and Italy).

So, what should a European Bank Regulator do? Well, it should protect the banking system from sovereign default. It should declare that  sovereign debt is risky, require marking it to market, require large capital against it, and it should force banks to reduce sovereign exposure  to get rid of this obviously "systemic" "correlated risk" to their balance sheets. (They can just require banks to buy CDS, they don't have to require them to dump bonds on the market. This is just about not wanting to pay insurance premiums.) It should do for the obvious risky elephant in the room exactly what bank regulators failed to do for mortgage backed securities in 2006.

Billing codes

A while ago, an acquaintance saw her dermatologist for an annual check. She said, "oh, by the way, take a look at the place on my foot where we removed a wart a while ago." The doctor looked at her foot, said everything is fine, then finished the exam. Checking the bill, there was a $400 extra charge for the wart examination!

This nice audio story from NPRs "third coast festival"  tells the story of billing codes. Answer: As insurers and medicare/medicaid reduce payment for services, doctors respond by writing up every billing code they legally can. There are whole conferences devoted to billing code maximization. It's a lovely unintended-consequences story. Good luck with that "cost control."

The piece quotes the Institute of Medicine that there are 2.2 people doing billing for every doctor, at a $360 billion dollar cost. I couldn't find the source of these numbers. If any of you can, post a comment.

Of course, being NPR, the program leaves the impression that all this will be fixed in our brave new world of the ACA. But it wasn't even that heavy handed on the point. Perhaps experience is gaining on hope.