Today it's your turn – what are you thinking about? What are you reading? Are there topics you'd like us to write more about? Less about?
To get you started – this morning I was reading about Spillonomics – forecasting unlikely events. And I'm trying hard to think about everything except unfolding disasters.
Worthwhile Canadian Initiative 
What is the rationale for taxing income more than capital gains? Do any countries tax income and capital gains at the same rate?
I’d like to know more about the inflation hawk/inflate for more Demand dichotomy. We spent most of the adult lives of the current ruling set worrying ourselves sick over inflation, and now for the first time since the 1930’s we have an aggregate demand problem and need more inflation. I’d like to see more on the policy and psychology battles around this.
I’d like to understand better the fear that many economists have around deflation and liquidity traps/deflation spirals, mostly through the assertion that we don’t want to experience deflation of any kind just in case we hit a trap/spiral. How often in the past 80 years have we seen a liquidity trap? And, why the would the current(previous) ressession regularly be compared to the Great Depression, when (given my reading and understanding) that they tend to be very difference with respect to monetary and fiscal policy?
And if you’re up to another one – as it seems to be a follow on from the last one – is there any truth to the idea that there has been a massive contraction of M3 in the US (world?) over the past couple of years, and if so, what implications would this have for the likelihood of a trap/spiral?
Thanks in advance either way!
Regarding M3 in the US.
http://www.shadowstats.com/alternate_data/money-supply-charts
I second the “why are you so afraid of deflation?” question, and follow it up with, “can you imagine a scenario in which deflation would be desirable?”
I’m not an economist, but the standard ‘deflation is bad’ story is not all that complicated. Let’s agree that by deflation we mean sticky price deflation (i.e. core CPI or some similar measure).
One scary thing is the debt deflation dynamic. Others can better explain it – just Google it. Another scary thing is that deflation can do weird things to time preference. If I know that prices are going to be lower tomorrow than today, then I’m going to hoard my cash rather then spend it. Hence Keynes observation about ‘use, decay, obsolescence’, which seems to me to essentially be the paradox of thrift (or Nick’s excess demand for money story). Either way, you end-up with insufficient AD a.k.a a general glut. This leads to unemployment, which further destroys demand, which fuels more deflation, lather rinse repeat. Next stop, the stone age.
As for the comparison to the Great Depression; until monetary authorities around the world (especially the Fed), managed to stop the slide we where on a trajectory that was at least as bad as the Great Depression. Thank God we had tossed out the barbarous relic, otherwise it’d be 1932 all over again. If you compare places like Estonia and Latvia and Spain, who can’t (or won’t) exercise expansionary monetary policy to stop the slide, you can see how bad it can get. 20%-30% drop in GDP and 20+% unemployment.
One reason the zero lower bound is problem is because, obviously, the CB can’t lower interest rates below zero, even if the state of the economy would dictate that they’d like to do just that. There’s also some more technical issues around the equivalence of bonds and cash that I don’t really understand that well. I think it essentially leads to people hoarding cash. Googling ‘Krugman liquidity trap’ should find an explanation.
Why is the liquidity trap scary? Well, if Japan’s experience is anything to go by, then once you enter the trap you are stuck there … forever. But who knows, maybe the US will be able to escape.
No doubt I got some of this wrong, but with all the PhDs around here they can set it straight.
Now back to my tomato plants…
I’ve just started reading “The Spirit Level” by Richard Wilkinson and Kate Pickett. The subtitle is “Why Equality is Better for Everyone”.
Perhaps economists need to think more about equality and less about growth.
I’d like more on the economics of energy. How do we get from here to there where “here” is an environmentally unsustainable path that has brought billions out of poverty in the last 200 years and “there” is a sustainable path that allows people to continue increasing wealth?
What really are the costs of being carbon neutral in 30 years? How will this affect the lives of the world’s poorer people in southeast Asia? Africa? China?
Can China power its economy without coal? India? …
Thanks.
Strange example in the Spillonomics article:
I could tell a different story with those facts, about rational people for whom the avoiding the cost of post-9/11 airline security warranted the increased time spent and risk of death in road travel.
Patrick, I understand the “issues” with deflation. The larger problem I have is better described with these points below – based on the points that you raised (thanks!).
– the debt deflation dynamic is an interesting narrative, but I’d like some significant empirical evidence (i.e. show me an example where deflation is a cause unto itself and is sustained)
– with respect to time-value issues, why is it good to have slightly positive real inflation (it is the conventional wisdom), but deflation causes apoplexy in Keyensian economists. In the extreme, deflation causes hording and inflation causes a lack of investment – at least that’s the theory with the rational-economic-man. Given that people tend to have large discount rates for the short- to medium-term why is one worse than the other, and why is one self reinforcing but the other isn’t. Wouldn’t prices being downward sticky make it less likely to get into spiraling deflation?
– WRT the Great Depression. I think that the Great Depression had a problem more with a massively shrinking money supply, significant new restrictions on trade and commerce, and government investment (New Deal) programs crowding out private investment (i.e. replacing an increasing multiplier with a decreasing one). The issue that you raise re: money supply now is inconclusive. Right now M1 is being maintained but financial restrictions are reducing M3 (hence my original follow on question). But, those things said, this is again one of the larger problems I have with the comparison – did we really dodge another significant depression or, as it seems to me, is it being used as political fodder to justify massive deficits and populist legislation. I tend to believe the latter.
– The trajectory overlay is not proof, though it is indicative of a possibility. I’d quite like to see the last 5 recessions overlayed on the Great Depression (I think I’ve seen chart like that recently (quite likely on WWCI) but I can’t find it.)
– While I’m not well versed in the monetary issues in Spain, Estonia and Lativia, taking a look at Estonia, you could explain the contraction and unemployment on a collapse of exports and the onset uneasiness that investment finds in that environment.
– The zero bound rate problem is a good one (and I don’t believe I understand it all), but a bloating of M1 (print like crazy) could theoretically get you out of that. Monetary policy has multiple tools, not just interest rate targets, including reserve ratios and the printing press (both by general debasement, and in the sense of lending money at a loss).
– I think the liquidity trap narrative for Japan is a red herring. I tend to view their problem demographically. The Japanese built an amazing, yet constrained economy through the last half of the 20th. The generation that inherited this machine in the late 80s and the 90s showed a lack of interest in towing the cultural line and productivity growth cratered. Couple this with an aging population (smaller workforce) and a serious lack of free trade in people and business and you end up with a stagnating economy. A liquidity problem may come out of this, but it’s a symptom not the cause.
I’m happy to get any of these cleared up. Thanks!
TK: Well, this is how I understand it, but I’m not an economist so take it with a grain of salt:
– I think it’s the downward stickiness that’s key. When you get enough deflationary expectations/momentum going to break the glue of sticky prices, you have a really big problem (like a muscle car doing a brake stand and then releasing the brake).
– That’s sounds basically like Friedman’s story of the GD. I’m not qualified to debate it. FWIW, my own view is that the GD was a massive financial crisis made much much worse than it needed to be by gold fetters. I don’t buy the New Deal crowding out story; with so much idle capacity and massive unemployment, who was the Gov’t crowding out?
– You’ll have to debate that with Eichengreen et. al.
– I think the point is that in the liquidity trap, printing does nothing because it just sits in the vault. I do wonder to what extent the liquidity trap is a symptom of a banking crisis rather than a undesirable equilibrium, … Anyway, the idea is that you need to create enough inflation to get things moving again (this is just me parroting Paul Krugman – I also don’t fully understand it). I suppose a real helicopter drop to households would also do the trick, but I doubt any CB would actually do that until the world was practically ending.
– I’ve heard that story about Japan. I’m not qualified to say either way. Demographics and culture could certainly play a role.
I’ve gotten a very rough outline of which taxes are the least destructive, but I would like to hear more about it. Which tax rates should be raised and which should be lowered would presumably depend on how high each rate currently is in a jurisdiction, but my understanding is that the basic hierarchy of how efficient a tax is seems to follow this basic order:
1. Pigouvian tax
2. sales tax
3. income tax
4. tax on capital or corporate earnings
Is that correct? Where would other taxes fall (e.g. property tax, inflation “tax”, payroll tax)? In the real world, is it ever more efficient to choose a relatively progressive but damaging tax than to chose a relatively regressive but non-damaging tax and then make transfers to remove the disadvantage to poorer taxpayers? Is the optimal tax rate on capital zero?
TK: I believe part of the reason is this: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/01/ad-as-y-output-gaps-cuba-monopolistic-competition-and-recalculation.html . Because the economy is largely made up of monopolistically competitive firms downward demand shocks are more harmful than upward demand shocks.
A question I have been pondering:
Why are (some) people so fixed on the solar year as the appropriate accounting time frame for measuring budget balance? And why do they want us all to suffer to satisfy this odd fetish?
I found this article on complementary currencies fascinating.
The (theoretical?) role of expectations and credibility in monetary policy is something I have trouble keeping straight in my head. Not as fun as other stuff mentioned above though!
Thanks Patrick. Thanks too, jsalvati – I tend to forget the blindingly obvious monopolistically competitive aspect of the market. It must be painfully etched on a different part of my brain than the perfectly competitive theory I keep stored.
Thirsty Mind: “What is the rationale for taxing income more than capital gains? Do any countries tax income and capital gains at the same rate?”
Dunno. Partly capital gains aren’t real. If you get 2% capital gains, that’s merely reflecting inflation. (but it would be simpler and better just to tax capital gains over 2%).
You can look at capital gains as just an alternative return to savings, like interest income. A deeper question is why we tax interest income at all. Why not tax consumption, rather than all income (including savings)? I think Stephen did a post on this a while back, but can’t remember where.
TK: I did a couple of posts on deflationary death spirals a while back:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/12/why-dont-we-observe-macroeconomic-black-holes.html
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/12/horizontalism-black-holes-and-liquidity-traps.html
More posts on methodology(a priori vs empirical, mathematical vs axiomatic, methodological individualism vs holism) would be nice. 🙂
Bliktheterrible: Don’t forget land tax. Ricardo (Adam Smith too maybe?) knew it was perfectly efficient. Henry George made a political philosophy out of it.
@Paul: The Spirit Level is the epitome of junk science (and here, and here, and here). If you just started reading, might as well stop while your ahead.
There are indeed ways to make the case that equality produces Pareto improvement in outcomes (even at some costs to growth), but The Spirit Level is just garbage.
Everyone’s favorite MP from the Beauce Maxime Bernier just wrote a column calling for a 0% inflation target by the Bank of Canada and critizing efforts to raise the inflation target from 2% to 4%. There is also an implicit case for eliminating the Bank of Canada and going back the pre 1935 system of banks printing their own money. This has got to be one of the only times I have ever heard an MP make any sort of public comment regarding monetary policy however unconventional.
http://fullcomment.nationalpost.com/2010/06/08/maxime-bernier-how-the-central-bank-eats-your-money/
Even putting aside my … skepticism … of the Austrian view, that Bernier piece is just atrocious.
Except that we did have proto-Central Bank arrangements before 1935. The Bank of Montreal was the government’s fiscal agent and the Canadian Banker’s Association acted as a cartel to prevent bank runs. The traditional means to put a stop to runs was to merge the victim bank into a larger institution. The CBA usually worked out who was going to conduct the bail-out.
This is why the BMO is denoted as Institution 001 on cheques, BTW.
Anyone care to comment on Bernier’s latest posting on monetary policy?:
http://fullcomment.nationalpost.com/2010/06/08/maxime-bernier-how-the-central-bank-eats-your-money/
Thanks Nick. I think your post on why we don’t observe economic black holes is likely the one that started my thought process on traps and spirals.
Matthew: “Anyone care to comment on Bernier’s latest posting on monetary policy?:”
Oh God. What Patrick said. One hardly knows where to begin. How about:
“We are all consumers, and we all benefit when prices go down. If we pay less for one good, it means we have some money left to buy other goods.”
A lovely example of the “inflation fallacy”. Yes, we are all consumers. But where does our income come from? From producing and selling goods. The same rise or fall in the prices of what we buy is a rise or fall in the prices of what we sell.
It’s too depressing to go on. Now I feel bad about doing that post on that poor NDP MP, for saying one silly thing about performance and productivity not being what public sector workers are about.
Can’t really blame it on the Austrians either. He’s obviously picked up some Austrian views, but hasn’t understood them at all.
Nick, I think Bernier’s point is to get to those that don’t understand how money is created or managed. I believe his best bet it to say that the Fed prints money out of thin air, such as Ron Paul. Oh wait, he did. It’s not like the average everyday joe is a macro-economist, such as yourself 😛
Now, time for me to go back and read Prices and Production, since Bernier’s butchering of Hayek.
Justin: he’s essentially right on that point (about money being created out of thin air, or paper and ink, same thing). You’re a brave man, reading P&P!
Nick: 530 pages! Why can’t Austrians make nice little textbooks? They don’t oppose the use of charts and clever images. Every book the Austrians make, tend to be between 500 and 1300 pages, of very small font.
And for the posts, could you write some more heterodox postings? I rather enjoy reading them, specially your ‘comments’ of Post-Keynesians.
Actually I guess you didn’t write much about Post-Keynesians, I was thinking of Boettke’s comments from Coordination Problem.
From Maxime Bernier (in the link from Matthew, above) “All this guessing about setting rates has nothing to do with capitalism and free markets”
It’s obvious how ‘capitalism’ and ‘free markets’ are talismans for the man. Kind of scary reading the whole thing. Maybe you guys could write a post or two about ‘free marketism’ as a sort of modern religion impervious to science or evidence? 🙂
Declan: Bernier’s main language is french, give him a break, ha-ha. But what he is probably getting at is the greater monopoly on money, instead of simply speaking about interest rates. The man doesn’t disagree that you need to control the money supply, whether in a monopoly or with a single bank when you have competing currencies, but it isn’t a free market when the government control’s a monopoly on it.
I agree they should write more on methodology, but, ‘free marketism’ is not a modern religion, and often is based on axioms. A different methodology is not impervious to science, it is science. Evidence can be abstracted from psychology and history, you can pretty much say anything you want, as long as you change the scope and methods. Let’s not forget the ‘socialist equality’, which is still around.
Please don’t start up on Free Banking. Please, pretty please.
Don’t plan on it.
Book recomendations if anyone cares:
Solow and Hahn “A critical essay on modern macroeconmic theory”
Phelps, “Structural slumps”
Gorton “Slapped by the invisible hand”
Minsky “John Maynard Keynes”
I like Blikk’s question. Economists know Pigouvian taxes are efficient ignoring the transaction costs of lobbying and mild brainwashing by regressive actors.. I think WCI agrees on consumption taxes like the hated GST as do most economists. But WCI has been a deep proponent of corporate tax cuts (to nothing?) as well as highlighting how low our historically low federal spending is. I’d be curious to know if the choice is further cuts to Canadian social programmes are acceptable to further cut our almost lowest-on-Earth corporate tax rates? Because our big corporations are finance and petro, and because we are sliding down UN quality-of-living charts, answer seems obvious… that G8 cost overrun could’ve funded daycare in low unemployment cities (many CPC strongholds)…
I like Flaherty’s argument about bank taxes, it screams for some analysis of global best-practises. Badly regulated nations should pay a higher tax. Analyzing efficient health best practises could be indexed into bond markets or whatever via a Ratings Agency Crown report for investors; tax breaks for teaching nurses or good staph programmes or medical robotics R+D. Probably need some basic hospital/board info that will piss off Unions.
I like the G8 artificial reservoir. Needs to be covered from evaporation and cheap to locally construct in Himalayas or Africa or Andes. I’m not sure if goal is to trap permanently melting glaciers/eroding aquifers, or to pre-create these where future rainfall will rise (can this be forecasted whether melted arctic will rain into southern Siberia (lots of recent Chinese GDP growth is reliable water for crops I assume)?
Second (or third or fourth) the call to post on the Bernier speech/article. Deflation must be good because if the price of computers goes down we buy more of them? Along with the implication that those stupid professional economists who would support a positive inflation target would never have predicted that, but Bernier has the common sense to see it?
And this made the front page of the National Post, which also suggests that Bernier may want a return to the gold standard, and talks about the possibility of Bernier mounting a run for Conservative leader.
Truly, you would be doing the entire country a favour.
I keep hoping the Bernier speech will go away…
“I keep hoping the Bernier speech will go away…”
Ok, like 99% of Canadian politicians, Bernier doesn’t understand macroeconomics very well. But he is very sensible about a lot of other economic/industrial policies. He has pushed for easing restrictions on foreign investment in telecom (fighting the Canadian state capitalists and his own bureaucrats), and has been a strong advocate for cutting federal spending and taxes. Stephen, I know you have posted that bearing in mind the size of the economiy, federal spending is less now than it was 50 yrs ago. True enough, but thats no reason not to target wasteful and inefficient spending, of which there is a huge amount at the federal level.
Assertion: The recession was a “made in newsroom” recession, with the media falsely claiming we were in recession several months before we had one let alone two quarters of negative growth.
Yeah, a “recession” featuring 25 SUV long lineups at the Tim Horton’s drivethrough. Riiiiiight.
The last “recession” featured economists on the payroll of banks, the auto sector, and construction calling for bailouts benefiting banks, the auto sector, and the construction sector. Assertion: made in newsroom recession is to economists as Enron was to accountants.
What else…the GST cut. Twelve billion dollar tax cuts don’t grow on trees and as the Prime Minister pointed out, 39% of female tax filers (2005 numbers) didn’t pay any income tax, that’s one reason among several that he did a GST cut instead of an income tax cut.
Was there a single expletiving economist in Canada besides the usual suspects (Fraser Institute, etc.) to publicly state that borrowing fifty billion bucks to “stimulate” the economy wasn’t such a hot idea? I didn’t see it.
Could you please explain to the funny money people that Canada doesn’t have a feddle reserve but rather a publicly owned central bank?
What else…public spending as percentage of GDP in China is like 30%, lower than Canada and the USA, can we please stop calling them communists and ourselves capitalists?
Inflation: what’s the deal here? I don’t think anybody believes the cost of living has increased less than 2% either here or in America as the official numbers state.
Housing: supply and demand. Canada has the highest population growth rate in the G8 and the highest immigration rate in the world. This has caused a housing crisis; we pat ourselves on the back for being such swell people here in Canada yet on a fundamental issue like housing we might be the worst in the world. Leftist policies are horribly harmful to the poor.
Of the top 23 federal ridings by average home value going into the last election, the so called Big Business/Friend of the Rich Conservatives held precisely zero of them. Some of them were even NDP. These people vote left because they perceive the Conservatives as anti immigration, despite actually admitting more immigrants than either Martin or Chretien ever did, and they have a massive, six figure incentive to vote for parties they perceive to be pro-immigrant.
In Ottawa, the average one bedroom is $850, the average home is $300,000. For a comparable American city it’s more like $450 and $150,000. We are quite simply hostile to the poor and to young people in this country. The best thing you could do for the poor is to significantly reduce immigration; economists, being home owners, have a massive financial incentive to collude to cover up this very important social issue. Oh, and wages have been driven down massively by this same problem. I cannot overemphasize how harmful left wing politics are to the poor.
In normal countries, people accumulate wealth by getting a job or transacting business and saving; in Canada, people accumulate wealth by buying a $350,000 bungalow on a 35 year mortgage, squeeze your pennies for 20 years from the twenty grand a year you actually take home, vote Liberal to artificially stimulate demand for housing via world’s highest immigration rate, then sell your house to an immigrant. It’s a scam that would make Charles Ponzi blush.
Feminism: a function of the top marginal income tax rate (F=mI).
Actually social democracy is more of a pyramid scheme than Ponzi scheme, fronting coin from people who aren’t born or haven’t arrived in Canada to fund a lifestyle beyond our means. Here’s a term baby boomers are going to start hearing more of: intergenerational equity, which the UN recognizes as a human right. Deficits are a human rights violation, taxation without representation.
30% of immigrants don’t file income tax, according to the government’s own numbers, because they allegedly “don’t know how to”. Can we please recognize this when we talk about immigrants being critical to Canada’s success and funding our social programs?
Unions: 20th century solution to a 19th century problem, we need to ban them.
Dalton McGuinty: regressive health premium tax, regressive HST, regressive hydro increases, and the retention of Harris workfare with the same welfare rates as Harris. He’s actually more anti poor than Harris and it would be nice if an economist pointed that out.
Foreign aid: Haiti has taken the unusual step of asking people to please stop giving as it is ruining their economy. Would the economists be so kind as to point out to well meaning Canadians demanding more foreign aid that it often does more harm than good?
Skilled immgration: poor countries pay good money to educate and provide health care for their best and brightest to become doctors, engineers, etc., only to be poached by Canada. Alternatively, our immigrants aren’t skilled. Either way, I see fail.
Max Bernier: we have 307 elected MPs who are cool with unsustainable human rights violating deficit spending and one (1) who has a problem with it. And he’s the bad guy? Why do Canadian economists implicitly collude to violate human rights, which is precisely what they are doing by advocating the taxing kids who aren’t born yet?
Hey, you asked what was on my mind, I’m happy to oblige.
Is it too late to add to the list? I’d like to see some analysis, perhaps building on the recent report on rising inequalities in Canada, of the notion that “we’re getting worse off”. The analysis I heard of the data made me wonder – for instance, that a family had to work more hours now than it did 25 (or something) years ago to make ends meet. If I compare our standards of living from 25 years ago, perhaps incomes seem to stagnate but we definitely buy more “stuff” with it, so in the end we seem better off. In other words our conception of poverty changes over time, we still feel poor even though “poverty” is more comfortable than it was.
Then, the notion that the family needs to work more hours to make ends meet also implies that some members – women – were not working before… No data was offered to make that case though. I think difference is that these “idle” people are now engaged in more paid work, and buy some of what was previously provided “for free” (eg paying someone to peel and chop vegetables rather than doing it at home).
So, are we on average richer or poorer (in terms of standards of living) than our parents, and what would be a good way to assess this, since income is a poor indicator?
I would like to hear (well, read) Ms. Woolley’s answer to my question on the corporate tax reading list entry. Shiny Happy Conservative commented that,
“I opposed the Green Shift partly because twenty years ago when I was a student of Professor Woolley she taught us that a “good” tax was one that was, among other things, visible, non-distortionary, and not regressive. The Green Shift was invisible, distortionary by design, and regressive.”
I want to know if Ms. Woolley supports that characterization of her views on taxes and agrees that the green tax shift is bad.