Saturday, September 25, 2010

Tax the Rich

Some U Chicago professor made the impolitic observation that taxes on the "rich" don't actually fall on the rich at all. They fall on professional, college educated, working couples. He's been pilloried, and taken down the post (although I'm sure it lives on). Nevertheless, his central observation is quite correct.

$250K/year is a good income, but not nearly enough to become a Lloyd Blankfein style malefactor of great wealth. This income will not let you buy an entry level house in a good school district in California. And I'm not talking Beverly Hills style mansions here, I'm talking 2BR 2BR 50 year old light construction in Menlo Park. It is not enough to buy material political influence, a la the great Robber Barron fortunes that seem to fuel most of the non-profit industry. And if you think public schools are mediocre -- certainly they are a shadow of what they were two generations ago -- private schools will chew up a bunch of that if you have the audacity of reproducing. Never mind that your prodigy is likely to the productive and remain out of jail.

Don't get me started on college tuition.

The WSJ's advice is comical. I mean, here we have a couple who is the very model of honest, smart, hardworking citizens, actually producing real value in the society instead of being government-backed Wall Street vampires, and they are told to:
- get by with one car
- move (the claim is that Chicago, Chicago! is too expensive to live in)
- cut discretionary expenses

The biggest joke is at the end of the article:
Never, ever, ever again blog about how hard it is to live on $300,000 or $350,000 a year at a time when one middle-aged man in four can't find a full-time job, and one in five can't find any job at all.
And how exactly will yanking your kids from private school, getting rid of a car, and cutting all discretionary expense going to help the unemployed teacher, autoworker, dry cleaner, restauranteur, and gardener?

Federal taxes do not fund spending. They moderate aggregate demand. Our professional couple here is exactly the type of person an economy, and nation, wants more of. I also suspect that their discretionary spending represents marginal AD in this economy.

Tuesday, September 21, 2010

The Real Problem with a Higher Inflation Target

It's comical to read the reasons people give for why the Fed should not officially raise its inflation target. This one is really funny:
Part of the credibility problem stems from the political environment, especially in Congress. Imagine the day after the announcement of a plan for 3 percent inflation. Older people, creditors and workers on fixed incomes — all connected to powerful lobbies — would start to complain. Republicans would wonder whether they had found a new issue on which to campaign, namely, opposition to inflation. And Democrats would worry about what position to take. Presidents of some regional Fed banks would probably oppose the policy publicly.
Did you get that -- pensioners (who are more dependent on debt securities for income, and therefore more actively hurt by low interest rates) will get mad and those evil Republicans will then turn that into an election issue.

I have a more straightforward suggestion: the Real real problem with a higher inflation target is that the Fed has no tools to hit it. Monetary policy merely shuffles and changes the term structure of outstanding assets. It does not create new assets. Therefore, in an environment where aggregate demand is being held back by insufficient net financial assets in the private sector, the Fed can announce things until the cows come home, but it cannot influence AD, and therefore, inflation.

Friday, September 17, 2010

The Fatal Flaw is Economists

Simon Johnson points to what he thinks is the fatal flaw in Basel III:
The heart of the substantive discussion regards whether tightening “capital requirements” – the buffers against losses that banks are required to hold – will have a negative impact on the economy. The banks insist that requiring them to hold more capital would slow lending and therefore slow the real economy. The global banks’ Institute for International Finance issued a paper in June that insisted on this point, but there is really no substance to their claims.
I would argue that the fatal flaw is that economists don't understand how banks work, and therefore don't understand the role of capital requirements, or what capital fundamentally is.

Higher capital requirements absolutely limit what banks can lend. Short term, they do this by creating a hard limit to the quantity of loans a bank can extent (ie. capital plays the role economists think reserves play). Long term, a more leveraged bank is more profitable than a less leveraged bank, so higher capital requirements raise the marginal cost of capital, and thus raise the hurdle rate governing the marginal loan.

Tighter lending standards are a good thing, but in the face of an administration that will not increase household aggregate demand, they will also have a negative impact on the economy.

Wednesday, September 15, 2010

Krugman is part of the problem

MMTers like to claim Krugman as one of their own, and why not? A Noble Prize, a Princeton tenureship, and a column in the NYTimes make him quite a catch. But fundamentally he is not MMT, he is a mainstream macroeconomist, and therefore part of the problem:
It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending.
The only reason to reduce the Federal deficit, long term or short term, is to control aggregate demand if there is too much inflation. That does not exist now, and given how overleveraged and underutilized the non-Govt sector is, I don't see it appearing too much in the future either. Our recovery is L-shaped, and the US is turning Japanese (although with better equity performance, I believe).

Friday, September 03, 2010

Sloppy Google, Sloppy Apple

I have a feeling that Google's new gmail/phone feature came out of a conversation that went something like this:
Googler1: Have you read pandas vs lobsters? We're pandas, and we need to become lobsters!

Googler2: Pandas are googley. Lobsters are not.

Googler3: I think the cafeteria is serving lobsters today.

Googler1: The only lobster product we have is YouTube!

Googler2: Youtube is full of inefficient time wasters. They suck.

Googler3: No, they served lobster yesterday. Today's they're serving deep friend panda. Yum!

Googler1: People seem to spend the most time on gmail after YouTube.

Googler2: Email can be productive.

Googler3: Deep friend paaanndaaa! (drools)

Googler1: Let's let people make calls from gmail, and then they will spend even more time in that application, being social, and we will be more like lobsters.

Googler2: Then maybe we can bring back Google Buzz too. Or was that Google Wave?

I also have a feeling, that Apple's Ping service came out of a conversation like this:
His Steveness: Have you read pandas vs lobsters? We make beautiful hardware, so maybe we're beavers, and we need to become lobsters!

Minion: The iPhone is social. It's like a lobster

His Steveness: Not social enough. I need a new minion!

Minion2: iTunes could be social. Music is a social thing. And we could make it easy for people to get started by using Facebook Connect!

His Steveness: But then we wouldn't control everything. I need a new minion!

Minion3: iTunes could be social. Music is a social thing. And we can make people register with us and control them.

His Steveness: Excellent! Does it involve the web in any way?

Minion3: It needn't. We can have it all run in iTunes.

His Steveness: Will this make it opaque to SEO? Will anyone be able to integrate?

Minion3: We could build it that way.

His Steveness: New minion!

Minion4: No. Never

His Steveness: Excellent. Make it so
Ping sucks. The gmail/Google phone thing doesn't make too much sense either to me. Maybe I'm missing something.