Wednesday, March 7, 2012
Nordhaus Provides Detailed Refutation OF WSJ Article On Global Warming Denial
The WSJ found 16 scientists to argue against global warming, They improperly interpreted data from the Yale economist, William D. Nordhaus, to reach their conclusions. This made Nordhaus angry. This is a detailed refutation of the claims made in the WSJ. He provides data that refutes each of their six reasons for being skeptics on global warming.
Krugman Is Concerned That One Of The Good Guys Wants Austerity In US To Spur Structural Reforms
Paul Krugman despairs because a good guy makes the case for austerity in the US. Krugman is less sure that structural reforms are needed in the US, and he has a less rosy outlook on the US recovery. It will take the US 4 years to reach a 5.5% unemployment rate if we add 179,000 jobs per month. Should we accept 4 more years of high unemployment?
Mankiw's Defense Of Romney's Taxes Is Criticized In More Detail
James Kwak provides his critique of Greg Mankiw's defense of Mitt Romney's tax rate on his gains as a private equity manager which are taxed at the capital gains rate of 15% and not at the 35% tax rate for labor income.
In an earlier post I ignored the points raised by Kwak in order to show the subtlety in Mankiw's defense. It was only necessary for him to make the point that it is difficult to define a capital gain in some of the examples that he gave. Kwak, argues that Ronmey provided labor in achieving his gain at that it should be taxed at the ordinary income rate.
One could go further and ask whether Romney had any capital at risk. The rationale for the lower tax rate for capital gains is to encourage risk taking. One could take this a step further and ask why the gains from labor should be taxed at a higher rate than the gains from capital investment. They were taxed at the same rate prior to GOP tax "reforms". Neither Mankiw or I went that deeply into the topic.
In an earlier post I ignored the points raised by Kwak in order to show the subtlety in Mankiw's defense. It was only necessary for him to make the point that it is difficult to define a capital gain in some of the examples that he gave. Kwak, argues that Ronmey provided labor in achieving his gain at that it should be taxed at the ordinary income rate.
One could go further and ask whether Romney had any capital at risk. The rationale for the lower tax rate for capital gains is to encourage risk taking. One could take this a step further and ask why the gains from labor should be taxed at a higher rate than the gains from capital investment. They were taxed at the same rate prior to GOP tax "reforms". Neither Mankiw or I went that deeply into the topic.
Tuesday, March 6, 2012
A Tale of Two Depressions
This article on how we have responded to the Great Depression and the Great Recession is a good lead into the following post on Paul Krugman's speech in Lisbon.
Paul Krugman's Speech In Lisbon On The Failures Of The Economics Profession In Great Recession
Paul Krugman's speech in Lisbon provides his analysis of the economics profession failures to deal with the Great Recession. He does a great job in pulling it all together. He does not believe that the profession is guilty of not predicting the GR. He does find it guilty of not understanding the growing role of the shadow banking system and the excessive use of leverage, and the dangers that they created which led to the financial crisis.
He also argues that practical and wise business people, and many experienced investors, have an intuitive understanding of how the economy normally operates which is adequate for normal business cycles. We don't need economists in normal periods. They were needed in the GR and the profession let us down. The DSGE models that are widely used in macroeconomics were not as useful as the older IS-LM models which did a better job of predicting what would happen, and in explaining why fiscal policy was even more important when the private sector was deleveraging. The DSGE models are essentially based on the failed real business cycle model with the addition of sticky prices and sticky wages.
There is normal tendency of politicians, who spend lots of time with practical business people, to look to them in a crisis. That was a big mistake. Their experience is less useful in abnormal periods. They encouraged politicians to make the mistaken analogy between how families respond to a fall in revenues and what government should do. The GR was not the time for government to tighten its belt. The GR is essentially a problem of depressed aggregate demand, and restoring business confidence is not the solution for increasing aggregate demand. Businesses respond to demand. They invest when spending is high and they hold back on spending in periods of weak demand. Economist's familiar with the IS-LM model were better prepared to provide advise to government.
Krugman is also critical of the role played by "fresh water economists", particularly those from the University of Chicago who revived Say's Law, which had been disproven long ago, to argue that government stimulus spending could have no impact on the GR. They provided lots of help to politicians who shared their view that government intervention in the economy only made things worse. The GR led to lower tax revenues and increased federal spending on transfer payments. Fresh Water economists aligned with politicians who used the resulting budget deficits to attack spending on social programs that conservatives have never liked. They put the focus on deficit reduction when we should have been paying more attention to aggregate demand and high unemployment.
He also argues that practical and wise business people, and many experienced investors, have an intuitive understanding of how the economy normally operates which is adequate for normal business cycles. We don't need economists in normal periods. They were needed in the GR and the profession let us down. The DSGE models that are widely used in macroeconomics were not as useful as the older IS-LM models which did a better job of predicting what would happen, and in explaining why fiscal policy was even more important when the private sector was deleveraging. The DSGE models are essentially based on the failed real business cycle model with the addition of sticky prices and sticky wages.
There is normal tendency of politicians, who spend lots of time with practical business people, to look to them in a crisis. That was a big mistake. Their experience is less useful in abnormal periods. They encouraged politicians to make the mistaken analogy between how families respond to a fall in revenues and what government should do. The GR was not the time for government to tighten its belt. The GR is essentially a problem of depressed aggregate demand, and restoring business confidence is not the solution for increasing aggregate demand. Businesses respond to demand. They invest when spending is high and they hold back on spending in periods of weak demand. Economist's familiar with the IS-LM model were better prepared to provide advise to government.
Krugman is also critical of the role played by "fresh water economists", particularly those from the University of Chicago who revived Say's Law, which had been disproven long ago, to argue that government stimulus spending could have no impact on the GR. They provided lots of help to politicians who shared their view that government intervention in the economy only made things worse. The GR led to lower tax revenues and increased federal spending on transfer payments. Fresh Water economists aligned with politicians who used the resulting budget deficits to attack spending on social programs that conservatives have never liked. They put the focus on deficit reduction when we should have been paying more attention to aggregate demand and high unemployment.
The Koch Brother's Seeking Greater Control Over Cato Institute
This article describes the effort by the Koch brothers, who founded the libertarian Cato Institute 30 years ago, to tighten the link between Cato and other advocacy groups funded by the Koch brothers. The Koch brothers are suing Cato, in their home state Kansas, which gives them a better chance for gaining legal control. They have also stopped contributing to Cato's annual fund drives. The Cato institute has generally supported the GOP on economic issues but it has more independent on social issues such as gun control, same sex marriage etc.
This battle between Cato and the Koch brothers is part of an effort by the Koch brothers to extend their influence over non-profits that are useful to them economically. Super PAC's such as American's For Prosperity, which were empowered by the Supreme Court's Citizen's United decision, are effectively replacing the Republican National Committee as the leadership of the GOP. The Koch brothers have also funded and organized the Tea Party which has had a dominant role in the GOP primary campaign.
This battle between Cato and the Koch brothers is part of an effort by the Koch brothers to extend their influence over non-profits that are useful to them economically. Super PAC's such as American's For Prosperity, which were empowered by the Supreme Court's Citizen's United decision, are effectively replacing the Republican National Committee as the leadership of the GOP. The Koch brothers have also funded and organized the Tea Party which has had a dominant role in the GOP primary campaign.
Monday, March 5, 2012
Greg Mankiw Comes To The Defense Of His Client Mitt Romney
Greg Mankiw argues that it is not easy to distinguish a capital gain from ordinary income. His client, Mitt Romney, is being criticized because his income, that comes from his private equity firm, is taxed at the 15% capital gains rate instead of at the 35% tax rate for ordinary income in Romney's tax bracket. His defense is like that of those who deny global warming. They don't have to prove that it does not exist. They just have to argue that there is uncertainty about how to interpret some of the data.
Mankiw also misleads us by writing that the capital gains tax rate has varied over time. This too is a correct statement of fact. On the other hand, it is also a fact that it was once taxed as the same rate as ordinary income, and that the tax rate on capital gains has been reduced substantially in recent years by GOP administrations. The changes in the tax treatment of capital gains are not random historical events. The downward trend is a statement about how the tax burden should be shared. Warren Buffet, who benefits from the cuts in the capital gains tax rate, claims that it is unfair. Fairness is not a concept that is used by economists. Mankiw, and others, argue that it is a normative concept and that economics is a positive science that nothing to add about questions of fairness. He just wants us to be fair about how we view his client.
Mankiw also misleads us by writing that the capital gains tax rate has varied over time. This too is a correct statement of fact. On the other hand, it is also a fact that it was once taxed as the same rate as ordinary income, and that the tax rate on capital gains has been reduced substantially in recent years by GOP administrations. The changes in the tax treatment of capital gains are not random historical events. The downward trend is a statement about how the tax burden should be shared. Warren Buffet, who benefits from the cuts in the capital gains tax rate, claims that it is unfair. Fairness is not a concept that is used by economists. Mankiw, and others, argue that it is a normative concept and that economics is a positive science that nothing to add about questions of fairness. He just wants us to be fair about how we view his client.
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