Dr Doom

A profile of economist (and Harvard PhD) Nouriel Roubini.

Obama's Top Marginal Tax Rate

My friend Bob Carroll does the math:

Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises...from 37.9 percent to roughly 48 to 50 percent. "High" is in the eye of the beholder, but these are tax rates not seen since before the Tax Reform Act of 1986.

Note: These calculations work as follows: (1) 37.9 percent equals the current 35 percent top income tax rate plus the current 2.9 percent Medicare tax rate; and (2) 48 to 50 percent equals Obama's 39.6 percent top income tax rate plus the 2.9 percent Medicare tax rate plus his additional 2-to-4 percent hike in the Social Security tax rate plus an additional roughly 4.5 percent for the phase-out of personal exemption and certain itemized deductions.

I suppose that, for thinking about work incentives, one should add on a few percentage points for state and local taxes as well.

How to Prop Up the Housing Market

A proposal from Alan Greenspan:

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."

A Portrait, in ASCII

From a former ec 10 student.

Toward, and Away From, Bipartisanship

Obama economic advisers Jason Furman and Austan Goolsbee described the Obama tax plan in yesterday's Wall Street Journal.

A notable sentence:

The tax rate on dividends would also be 20% for families making more than $250,000, rather than returning to the ordinary income rate.

That is, Senator Obama appears to embrace the principle that dividends should be taxed at a much lower rate than ordinary income. (Recall that this income has already been taxed at the corporate level.) This principle was a fundamental premise behind the 2003 tax bill, signed by President Bush and opposed at the time by a vast majority of Democrats in Congress. If we can now achieve bipartisan consensus to limit the tax burden on corporate capital, that would be a significant step in the right direction.

On an unrelated issue, however, the Furman-Goolsbee piece seems to take a surprising step away from bipartisanship. They take a swipe at Senator McCain's proposal to replace the tax exclusion for employer-provided health insurance with a more flexible health insurance credit. When President Bush suggested a similar idea last year, Furman and coauthors called it "a step in the right direction," and many other commentators agreed. It is too bad that Team Obama is now dissing the proposal.

Summers on the Economy

The latest from Larry.

The Obama Tax Plan

As analyzed by Alex Brill and Alan Viard. Click through to read the thousand words, but here is the picture:

Update: Alan Viard asks me to post this note:

Given some confusion on the blogosphere, I want to reiterate that my and Alex' article does not find an increase in average tax rates, or in tax payments, at the income ranges shown in the chart. On the contrary, our article makes clear that Obama's proposed tax cuts would cause average tax rates and tax payments to decline throughout this income range. The point of our article is that Obama's tax cuts are designed in ways that raise marginal tax rates (the extra tax paid on an extra dollar of income) and therefore reduce incentives to earn income. The marginal rate rises because the size of the tax cut falls as income rises. The design of his tax cuts also increases the complexity of the tax system. To avoid confusion, anyone posting our chart should also post (and thoroughly read) our article.

Follow the link above to the article.

The Big Sort

Robert Samuelson reports that Americans are increasingly living near people who think like them:

[The researchers] classified counties as politically lopsided if one candidate won by 20 percentage points or more. Their findings are stunning. In the 1960 Kennedy-Nixon election, a virtual dead heat, 33 percent of counties qualified. By 2000, also a dead heat, that was 45 percent. In 2004, it was 48 percent.

Feldstein on Monetary Policy

Marty says:

The European Central Bank and the Federal Reserve are facing similar problems but pursuing different policies. The ECB has been raising interest rates while the Fed has been cutting them. The overnight federal funds rate is now 2 per cent while the corresponding ECB rate is 4.25 per cent. Which central bank is doing the right thing? Or could they both be?...

The power of Europe’s unions, its history of hyperinflation and the need to develop credibility for a young institution all justify the ECB’s tough stance. Because the Fed does not have these problems but faces a potentially serious recession, it is prepared to gamble that the weakness in US employment and the general decline in economic activity will prevent a wage-price spiral without further increases in the interest rate.... I think the Fed’s current interest rate strategy makes sense but would be too risky for the ECB.

Obama's View of Oil Markets

I have at times praised Barack Obama for having a good grasp of economic principles. But this passage from Ruth Marcus suggests otherwise:

Are oil companies, I ask, more morally culpable than other industries that would not be subject to Obama's proposed [windfall profits] tax?

"Not in the view of most economists," Obama replies. "I'm well aware of the argument (about) singling out oil companies rather than soda pop manufacturers," he says.

Yes, but what does Obama himself believe?

"I think oil companies are amoral. They want to make as much money as they can for their shareholders, which is what corporations do," he says. "The difference is the nature of the kind of outsized profits they make that may have no relationship to their investments or their production. The fact, for example, the shortage of refinery capacity could actually increase their profits so the less they invest the more they make indicates that you are not dealing with someone making widgets out there."

Obama is right about the amorality (not immorality) of oil companies. But he seems to suggest that oil markets are fundamentally different than others. In fact, in all markets, reduced production capacity would increase prices and, sometimes, would increase profits as well. That is why farmers can benefit from policies that induce them to leave land fallow. (I can't say about widgets--empirical studies of that market are hard to come by.)

Maybe Obama is saying that the forces of competition are absent in the oil market and that the deliberate decision by oil companies to keep capacity below competitive levels is the reason for today's high prices. That would be a logically coherent story, but not an empirically plausible one. It is not lack of competition that is keeping oil prices high but, rather, the basic forces of supply and demand. Even if you blame OPEC for noncompetitive behavior, that fact would hardly provide a rationale for taxing domestic oil producers, as Senator Obama is proposing.

Ec 10 in an Alternative Universe

Thanks to the blog reader PZ, who sent this in after reading this post.

The View from the White House

My friend in the White House emails me his analysis of a possible second stimulus package:

We are frequently asked whether there should be a "second stimulus" bill. Unfortunately, what is being considered on Capitol Hill is a very different animal from what we did earlier this year.

10-second macroeconomic review

GDP = Consumption + Investment + Government spending + Exports - Imports = C + I + G + X - M

In January the President proposed, and in February Congress enacted, a bill that was short-term macroeconomic stimulus. We wanted that stimulus policy to be big, fast-acting, an efficient use of taxpayer dollars, and an effective stimulus to broad-based economic growth. We let taxpayers keep more of their wages, assuming that they would spend some of those refunds, thereby increasing consumption (C). We also temporarily cut taxes on business investment in an attempt to increase (I). The idea is that these two actions would quickly increase GDP. Millions of American workers and families and thousands of firms can react quickly to a change in their financial status.

This strategy appears to be working. We've got evidence from multiple sources suggesting that people are spending some of their stimulus checks, and that this is helping to support increased consumption. It's harder to tell how much firms are taking advantage of the investment incentives, because it's hard to measure that in real time.

In yesterday's Wall Street Journal, Professor Martin Feldstein writes that the stimulus was a "flop". Specifically, he argues that the recent GDP data show that the boost to consumer spending from the rebates was small relative to the overall size of the rebates. He estimates that $12 billion was spent out of a total of $78 billion in rebates paid out by the end of June. The core of his argument is that we didn't get a lot of bang for the buck - only a small bump to GDP for a large loss of revenue for the government.

We disagree with this analysis. First, we think the stimulus bang is bigger than $12 B. Prof. Feldstein assumes that the growth in consumer outlays would have been flat had there been no stimulus. He then observes that consumer outlays actually grew by $12 billion more from Q1 to Q2 than they did in the prior quarter, and attributes that to the stimulus. Many observers think that, without the stimulus, consumer outlays would have grown more slowly in Q2 than in Q1. If this is the case (and we believe it is), then the effect of the stimulus is bigger than $12 billion.

In addition, we have felt only part of the bang so far. The stimulus enacted in February will have ongoing impacts in the upcoming months. Almost all the cash to consumers is out the door, but the resulting boost in consumer spending has not yet reached its full effect. We anticipate that the past stimulus law is continuing to increase GDP in the 3rd quarter, with a diminishing amount in the 4th quarter of this year. Monetary policy works with an even "longer lag" - the evidence suggests that when the Fed cuts interest rates, it takes about a year for half of the economic effect to take hold. So there's more bang left in the remainder of this year from past actions on both the fiscal and monetary sides.

Also allowing people to keep more of their money for one year is better than not doing so at all, so the loss of government revenue is actually a good thing if that money stays in the hands of the taxpayers who earned it, even if we can only get Congress to agree to do that for one year. We agree with Marty that the stimulus would be more effective if we had been able to enact a permanent tax cut, rather than a temporary one. Legislative realities forced it to be temporary.

On the second stimulus question, the following interchange from May 19th is instructive. Our deputy press secretary Scott Stanzel talked with a White House reporter at the "daily gaggle":

Q Scott, is the administration looking any more closely at a second economic stimulus package? The Commerce Secretary was on Late Edition over the weekend, and didn't directly and definitively shoot that idea down.

MR. STANZEL: Well, what's in the second stimulus package that you're talking about?

Q Well, just -- I'm saying that many in Congress say we need a second economic stimulus package.

MR. STANZEL: Right, but what's in that? That's the thing. The idea of the second stimulus has become sort of this catch-all phrase for adding a lot of additional government spending, or doing things that Democratic leaders in Congress may have wanted to do previously, but are now -- would want to sort of put under the umbrella of a stimulus package.

Before last Thursday, there was no second stimulus proposal. Now there's a proposal from the Chairman of the Senate Appropriations Committee, Senator Byrd (D-WV), but we have seen no indications that House or Senate Democratic leaders have signaled support for that proposal.

For more than two months we were asked to comment on something that did not exist. What does exist is pent-up demand in Congress to spend more money, and then to label that spending as a "second stimulus." We anticipate that demand will only increase as we get closer to an election.

Congressional advocates for increased government spending this Fall have been arguing, in effect, that we should expand (G) in the equation above, and that doing so will increase economic growth.

But trying to stimulate short-term economic growth through increased government spending has a few problems:

1. It's slow. - Construction projects take years to plan and build. History shows that only about 27¢ of each dollar is spent in the first year.

2. It's often funneled through States. - Infrastructure spending and increased federal funds for programs like Medicaid result in transfers from the Federal government to State governments. This transfer doesn't actually increase GDP, it just shifts money from one level of government to another. It's more like putting in motion 50 potential stimulus packages, each of uncertain efficacy and speed. Some States might try to spend the funds quickly. Others might shift money around and use the Federal dollars to pay down debt, or wait until their State legislature convenes next year to allocate the funds. There's also a danger that providing States with aid during challenging economic times will encourage states to spend irresponsibly during boom years, counting on Federal bailouts when times are tough.

You can make other arguments for spending more taxpayer funds on roads and bridges, but it's a highly inefficient tool to stimulate immediate economic growth. Many of the advocates for a so-called "second stimulus" know that spending taxpayer funds on roads and bridges is popular with voting constituents.

There's an important philosophical difference between the first stimulus (which was overwhelmingly bipartisan) and current Congressional attempts to increase government spending. The first stimulus proposed by the President looked at the economy as a whole, and tried to design a package that would help spur growth across the entire economy. Ideas being bandied about for a so-called "second stimulus" tend instead to take a constituency-based approach: they try to identify who is hurting, or who is politically powerful, and funnel government funding to them. Advocates then claim that these funds will stimulate broad-based economic growth.

We think that the first stimulus was both more fair and more effective by providing taxpayer rebates to more than 100 million Americans and broad-based business investment incentives to thousands of firms. And we think that there's more economic bang still left from those recently implemented policies.

In summary:

* We think the stimulus is working and increased Q2 consumption and GDP.

* The effects of the first stimulus are not yet complete. Most of the cash is out the door, but we think there will be increased consumption effects this quarter, and a diminishing amount in Q4.

* For many, "second stimulus" is code for "allow Congress to increase politically popular government spending shortly before Election Day, and call it macroeconomic stimulus."

* Increased government spending is slow and ineffective macroeconomic stimulus.

Is a windfall profits tax Pigovian?

Several people have asked me whether Obama's proposed windfall profits tax on oil companies is like the Pigovian tax on gasoline I have often advocated in the past. The answer is no.

Here is one reason, as explained by Josh Barro (son of Harvard economist Robert Barro):

Windfall profits taxes also drive up oil imports because they discriminate against domestic oil producers to the benefit of the Saudis and the Venezuelans—even Barack Obama lacks the power to impose production taxes on foreign oil producers.

To keep things simple, imagine we were considering a small country that takes the world price of oil as given. Then a windfall profits tax on domestic companies discourages domestic production, but has it has no effect on domestic consumption. By contrast, a Pigovian tax at the gas pump reduces domestic consumption but has no effect on domestic production.

In a hypothetical closed economy, production and consumption are the same, so the two plans become closer. But even then they are not exactly the same. A tax on (accounting) profits is not the same as a tax on production. The former may distort the the choice of factor inputs (that is, capital vs labor), while the latter will not.

The Obama windfall profits tax proposal, like the McCain gas tax holiday, shows one thing: Energy is too important an issue in this campaign to let the policy wonks get their way. Both candidates' energy proposals seem to have been written by their political consultants rather than their economists.

Addendum: Obama adviser Austan Goolsbee defends his candidate's plan. Austan's argument is that the windfall profits tax is justified because the oil companies have gotten subsidies in the past. I suppose a similar logic would suggest a new tax on economists who in the past have received government scholarships and research grants and are now enjoying substantial commercial success. Steve Levitt, watch out!

Feldstein on the Tax Rebate

Marty says it was a flop.

And they call this "progressive" taxation

From Tax Notes:

No one should conclude that taxes drove Ross Lockridge Jr. to suicide. However, tax concerns were a source of his distress that was magnified by his depression.

The Value of Oprah

New research from Craig Garthwaite and Tim Moore of the University of Maryland econ department concludes:

Winfrey’s endorsement was responsible for approximately additional 1,000,000 votes for Obama.

The Present Danger

Alan Greenspan opines:

It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs.... The danger is that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs. If that becomes widespread, globalisation could reverse – at awesome cost.

The Wu Index

Physicists have started using a new index to rank scholars, which has now been applied to economists.

A Reading for the Pigou Club

From Harvard economist Ed Glaeser.

A Paradox

Can the "the Mick Jagger of Harvard" be "Very dorky, very loveable"?

Why food prices are rising

From Yale's Ernesto Zedillo:

There's little doubt that the present spiral in grain prices is closely linked to U.S. and EU policies enacted to boost production of biofuels. The American and European governments subsidize the production of biofuels, limit their import and mandate their use. The exact extent to which these policies have impacted food prices is still a matter of contention, but not even the most enthusiastic proponents of ethanol can deny that by inducing a greater allocation of agricultural resources toward biofuel production, the amount of grain available for food has been reduced. According to the World Bank, while global production of corn increased by 51 million tons from 2004 to 2007, biofuel use of corn in the U.S. alone increased by 50 million tons, thus leaving no margin to satisfy the increase of 33 million tons in global consumption for other uses during the same period. This explains why some respectable experts, such as the former chief economist for the U.S. Department of Agriculture and a top World Bank agricultural economist, have imputed a large proportion of the rise in food prices to the growing use of food crops for fuel.

Wrongheaded biofuel policies constitute only one aspect of the complex and expensive web of protectionist agricultural policies practiced by most developed countries that the WTO Doha Round was supposed to fix. The leading trading countries have repeatedly failed to commit to real reform, with short-term political convenience overriding their own national long-term interests. The latest example of this anomaly is the new Farm Bill approved by the U.S. Congress in May. Instead of reducing agricultural subsidies, this bill provides for bigger and more distorting ones. Even more than the 2002 Farm Bill, this one has eroded U.S. credibility and leadership at the WTO trade talks and given the other key players yet another excuse to evade their own responsibility to make the Round successful.

Remember where the two presidential candidates stand on ethanol and the farm bill.

What do economics and hummus have in common?

They both come in a neoclassical variety.

Thanks to the blog reader who sent this in.

More on the GSE Rescue Bill

Larry Lindsey reports:

Congress rejected a proposal that Fannie and Freddie be barred from paying dividends if they are receiving injections of capital from the federal government. This idea would seem to be the first lesson in a course on Government Bailout 101. The government shouldn't be shoveling taxpayer money in the front door while the company is shoveling dividends to shareholders out the back door.

Freddie Mac paid $1.6 billion in dividends last year while Fannie Mae paid $2.5 billion. Both have dividend yields that are many times higher than the norm. Congress chose to protect the shareholders at the expense of the taxpayer.

The Cost of Being PC

Here is a ranking of academic disciplines by political correctness:

The most PC: Psychology, Sociology, English, History, Elementary education

The least PC: Criminal justice, Economics, Marketing, Accounting, Computer science, Biology, Finance, Management information, Mechanical engineering, Electrical engineering

Political correctness is defined here as "the belief that gender gaps in math and science fields are largely due to discrimination; support for affirmative action; and belief that discrimination is a key cause of racial inequities in American society. Generally, members of this cohort see race and gender as fundamental ."

I notice that the non-PC disciplines appear to correlate with the most lucrative college majors. Some might take this fact as even more evidence that life is fundamentally unfair.

Why everyone hates high gas prices

A hypothesis from Duke econ prof Dan Ariely:

if I stood next to the yogurt case in the supermarket for five minutes every week with nothing to do but stare at the price, I would also know how much it has gone up — and I might become outraged when yogurt passed the $2 mark.

The Biggest Issue

David Brooks channels Goldin, Katz, and Heckman.

LHS, vindicated

Alex Tabarrok is on the case.

What's interesting is not only that Larry was fundamentally right about the facts (no surprise there), but that much of the mainstream media are still reporting otherwise. Here is the one source that got the story right.

The GSE Rescue Bill

Larry Summers and Dick Armey weigh in.

Save My Iced Grande Latte!

News from Scrappleface:

Congress to Halt Closing of Unprofitable Starbucks

Democrats in Congress today plan to introduce a bill to halt the recently-announced closing of some 600 Starbucks coffee stores, noting that the displacement of 12,000 Starbucks baristas would overwhelm government aid offices not prepared to handle so many clients for whom English is a second language....

“These people can’t just walk out of Starbucks and get a job at a grocery store or a factory,” said House Majority Leader Nancy Pelosi, D-CA. “They would need ESL classes and cultural training to learn how to relate to ordinary Americans and function in society.”...

“This is just another one of our heroic Democrat efforts to protect Americans from the impact of the Bush economic policies,” said Rep. Pelosi. “Under this president, America has become a cold and desolate place where corporations cut unprofitable activities to focus on increasing the bottom line, and returning value to shareholders. When Democrats retake the White House next year, we will reverse that trend.”

Resilience

Robert Samuelson writes:

The paradoxical thing about today's economy is its strength. No kidding. Consider all the hand grenades lobbed at it. Higher oil prices. The housing implosion. Large layoffs in affected industries: autos, airlines, construction, mortgage banking. The "credit squeeze" triggered by losses on "subprime" mortgages. Despite all that, the economy hasn't collapsed. It's merely weakened. Output in the first quarter of 2008 was actually 2.5 percent higher than a year earlier.

The View from Chicago

The New Republic looks at what the right-leaning scholars at the University of Chicago think about Barack Obama. Unlike the profs at Chicago, where Obama taught, I have never met the Democratic candidate personally. But this quotation from legal scholar Daniel Fischel captures well my own ambivalence:

"He's much more intellectual, much more thoughtful, much more interested in discussion, debate, and dialogue than the typical politician. And that gives me some confidence about him, even though from my perspective he's much too liberal. I've never voted for a Democrat in my entire life. He's the first one I might vote for."

Cross-Price Elasticity of Demand XII

The next in the series:

demand for new, more fuel-efficient aircraft has never been greater. The latest versions of the Airbus A320 and Boeing 737, the single-aisle workhorses for which demand is strongest, are up to 40% cheaper to run than the vintage planes some American airlines still use.

Thanks, LBJ

The New Yorker looks at the GSEs. One tidbit:

It wasn’t until 1968 that Fannie was privatized....The main reason for the change was surprisingly mundane: accounting. At the time, Lyndon Johnson was concerned about the effect of the Vietnam War on the federal budget. Making Fannie Mae private moved its liabilities off the government’s books, even if, as the recent crisis made clear, the U.S. was still responsible for those debts. It was a bit like what Enron did thirty years later, when it used “special-purpose entities” to move liabilities off its balance sheet.

Time to pass out the WIN buttons

From the RTE Blog:

Fight Inflation the Venezuelan Way: Haggle

Venezuelan Agriculture Minister Elias Jaua asked consumers to start bargaining over prices with retailers to try to curb inflation.

“The most important help that people can give us (in fighting inflation) is that they defend their income. We can’t get used to buying everything at any price,” Jaua told reporters . “If we all start haggling over prices, speculators are going to start feeling pressured,” Jaua said....

The country’s annual inflation rate climbed to 32.2% in June....The Venezuelan government commonly blames speculators for the price increases.

For those too young to understand the title of this post, click here.

Cross-Price Elasticity of Demand XI

One more for our continuing series on how people respond to prices:

Golf carts switch course from green to road

Rising fuel costs drive move to economical but unconventional transport

From The Daily Show

A Income Tax Surcharge on Old, Sick People

Tyler Cowen makes the case,

Tyler gives the policy a different description: He calls it means-testing for Medicare. But this reform can also be described as in this post's title.

Click here for more on the topic.

Cross-Price Elasticity of Demand X

The Chicago Tribune reports:

Amtrak rides high as price of fuel soars

Soaring fuel prices are filling seats on Amtrak trains.... In the fiscal year that began Oct. 1, Amtrak ridership nationally has climbed 11 percent, to more than 21 million passengers, through June, and it expects to exceed the record 25.8 million set the previous year. "We believe the largest single reason is that people want to avoid the higher cost of driving their own vehicle," said Amtrak spokesman Marc Magliari.

Click here for a previous installment in this series.

Ed Glaeser on Paul Ehrlich

It's Our Earth, Now What Do We Do With It?

Who needs an inflation-targeting central bank when we have Pick n Pay?

Thanks to the reader who sent this in.