StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

The Andrew Samwick Archives

Succeeding Summers

22 Sep 2010
Posted by Andrew Samwick

If these statements from The Washington Post are true:

Sources said the White House is considering whether to choose a candidate who could blunt criticism that the administration has been anti-business, such as a corporate chieftain or prominent investor.

Administration officials are also eager to find a woman to fill a top economic role, since Romer's departure left Obama with an all-male group of principals at his daily economic briefing.

Then President Obama's first choice to succeed Larry Summers as Director of the National Economic Council should be Anne Mulcahy, former CEO and chairwoman of Xerox. 

Posted by Andrew Samwick

Now having had a chance to study the revised data on Gross Domestic Product and Gross Domestic Income, the NBER Business Cycle Dating Committee has determined that the recession that began in December 2007 ended in June 2009.  What is salient about the determination is the assertion that the intervening period has been an expansion, however weak, and that any new downturn would be a new recession.  I don't know how that will be spun by the political talking heads -- perhaps that any new recession is "Obama's recession."

The explanation is a carefully written statement, with important caveats, among them:

A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

Posted by Andrew Samwick

I have often wondered about the sequence of events that will unfold when our generation's debt comes due.  Who will pay it?  The answer is the owners of any productive capacity within the jurisdiction required to pay the taxes to service the debt.  And if those taxes are high, as they are on a path to be, we can expect to see attempts at avoidance (and evasion), as the most mobile assets and factors of production try to get out of that jurisdiction.  We'll know it's really bad when U.S. citizens start removing themselves to other countries to try to avoid such tax burdens.

While that particular development is a long way off (I hope), we can see the precursors in other areas. 

Posted by Andrew Samwick

I was wondering why I hadn't seen this point made before (h/t Brad DeLong), and then I realized I was in Vegas when the report came out.  It makes a very sensible point: if marginal tax rates on low incomes are reduced, then everyone who earns at least that amount of income has a reduction in total taxes paid.  So this discussion about whose tax cuts are being extended is a bit misguided -- if the reductions in the lowest marginal tax rates are extended, then every taxpayer's total tax payments are extended, at least in part.  Even those at the highest income levels will pay lower taxes (compared to the pre-2001 income tax schedule) than they would if all of the tax rate reductions above those on the lowest income levels were extended.  I recommend the whole post from the CBPP in the first link above.

Posted by Andrew Samwick

In this month's issue of Health Affairs is an article by Michelle Mello, Amitabh Chandra, Atul Gawande, and David Studdert that estimates the national costs of medical liability.  Here's what they find:

Concerns about reducing the rate of growth of health expenditures have reignited interest in medical liability reforms and their potential to save money by reducing the practice of defensive medicine. It is not easy to estimate the costs of the medical liability system, however. This article identifies the various components of liability system costs, generates national estimates for each component, and discusses the level of evidence available to support the estimates. Overall annual medical liability system costs, including defensive medicine, are estimated to be $55.6 billion in 2008 dollars, or 2.4 percent of total health care spending.

Posted by Andrew Samwick

Over at SeekingAlpha, Bo Peng makes the case that inflation, even moderate inflation, is a danger to baby boomers now approaching retirement:

Starting from right now, however, as babyboomers go into retirement or start deligently (perhaps belatedly) saving for retirement, inflationary policy will cause much more pain than ever seen before. Even under "moderate inflation" scenario, it's still a significant erosion of buying power and living standard over 10, 20, 30 years. The effect will be quite painfully clear, and soon, for those living on fixed income.

I was discussing this with a colleague last week. I think the lower-income retirees are not the most vulnerable here. Their income is primarily Social Security benefits, which are indexed to inflation. The most vulnerable are those with savings to supplement their Social Security benefits.

Posted by Andrew Samwick

The latest from the BLS on the employment situation is more of the same.  There was essentially no net job growth -- a decline of 54,000 consisting of a fall in government employment as Census workers finished up that was not quite offset by a rise in private sector employment.  The official unemployment rate went from 9.5 to 9.6 percent and the broadest measure of labor underutilization (U-6) went from 16.5 to 16.7 percent.  There is nothing in here that merits joy.  Expect the spinmeisters to focus on the rise in private sector employment (up 763,000 since the low in December 2009) and the upward revisions (to smaller job losses) from the two prior months.

Posted by Andrew Samwick

Jeff Jacoby summarizes what we know about the impact of the Cash for Clunkers program, one year later.  It isn't particularly flattering, for reasons easily predicted in advance and well summed up in this paragraph:

Congress and the Obama administration trumpeted Cash for Clunkers as a triumph — the president pronounced it “successful beyond anybody’s imagination.’’ Which it was, if you define success as getting people to take “free’’ money to make a purchase most of them are going to make anyway, while simultaneously wiping out productive assets that could provide value to many other consumers for years to come.

Survival Stories

01 Sep 2010
Posted by Andrew Samwick

The story of the miners trapped underground in Chile is fascinating.  Even with the 4-inch boreholes that have been drilled to supply them with food, water, and electricity, the men are in for quite a challenge for the next several months while a new shaft is drilled for their rescue.  Abetted by a gift of a Kindle reader, I have been doing some reading this summer about World War II and other parts of American history.  Here are some of the books that have been inspiring stories of survival, with some links in case you want to read more:

Tears in the Darkness: The Story of the Bataan Death March and Its Aftermath, by Michael and Elizabeth M. Norman.  You may know something about the march, but you may not realize just how brutal the subsequent years were as prisoners of war.

Build America Bonds

31 Aug 2010
Posted by Andrew Samwick

Here's some new research by Ang, Bhansali, and Xing on the impact of Build America Bonds:

Build America Bonds (BABs) are a new form of municipal financing introduced in 2009. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB program has succeeded in lowering the cost of funding for state and local governments with BAB issuers obtaining finance 54 basis points lower, on average, compared to issuing regular municipal bonds. For institutional investors, BAB issue yields are 116 basis points higher than comparable Treasuries and 88 basis points higher than comparable highly rated corporate bonds. For individual investors, BABs have lower yields than regular municipal bonds. Thus, on average the Federal government subsidy disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.

Counting the Stimuli

30 Aug 2010
Posted by Andrew Samwick

The main point of Laura Tyson's op-ed in Saturday's New York Times is correct: we should be using the occasion of very low interest rates on government debt to add to our productive infrastructure. 

But she makes a simple arithmetic error in the title, "Why We Need a Second Stimulus."  In fact, what she's arguing for is not the second but the third stimulus.  As is common with the current administration and its supporters, she forgets that the $150 billion infusion in early 2008 was a bipartisan attempt to prevent economic growth from stalling.  The Obama administration is now populated by those who, in late 2007 and early 2008, were calling for a "timely, targeted, and temporary" bout of deficit spending to prop up the economy.  They shouldn't be running away from it now.

Why does it matter what number stimulus this is? 

Tax Reform Tidbits

24 Aug 2010
Posted by Andrew Samwick

Say the word "tax" to me and I'll pitch you higher carbon taxes, sometimes paired with lower payroll taxes in the form of a green tax swap.  That's what I said to Chris Farrell, who wonders what else we might do to improve the tax code while everyone fights over whether the tax cuts from 2001 and 2003 should be extended.  Jim Poterba and Joel Slemrod are also quoted in the article, pointing out the virtues of capping deductions in the current income tax system -- broaden the base so that marginal rates can stay low.

I think tax reform, fundamental tax reform, and the debate over the extension of these tax cuts are a distraction.  Our big problem is that we don't raise enough revenue, not the particular forms in which we choose (not) to raise it.  I think the right policy on the "Bush tax cuts" is to let them expire. 

Posted by Andrew Samwick

I was in Las Vegas for most of the last week, and blogging was (tied with a lot of other things for the title of) the furthest thing from my mind.  But, being an economist, I am always on the lookout for markers of economic recovery. Walking around town, I noticed that there was barely any construction going on.  There is a new facility going up at the Venetian complex, but nowhere else that I could see.  But the best source of information always seems to be the taxi drivers.  We took a total of four cabs, two of whom had chatty cabbies.  The first told us that the recession ended in Vegas four months ago.  Since then, things have been back to normal.  The second suggested to us that the new normal wasn't as good as the old normal.  Conventions that used to not only bring people but throw lavish parties were still bringing the people but not throwing the same kind of parties.  Convention goers from nearby areas were finding their companies willing to fly them in and out for day trips rather than let them stay locally and potentially run up entertainment charges.

Leisure College, USA

05 Aug 2010
Posted by Andrew Samwick

New from Professors Philip Babcock and Mindy Marks is an analysis of trends in how college students are spending their time.  The answer is "less studying, more leisure."  The summary provided by the American Enterprise Institute is well worth the read.  Their conclusions:

  • Study time for full-time students at four-year colleges in the United States fell from twenty-four hours per week in 1961 to fourteen hours per week in 2003, and the decline is not explained by changes over time in student work status, parental education, major choice, or the type of institution students attended.
  • Evidence that declines in study time result from improvements in education technology is slim. A more plausible explanation is that achievement standards have fallen.
  • Longitudinal data indicate that students who study more in college earn more in the long run.

Why might achievement standards have fallen?  Quoting Babcock and Marks:

Posted by Andrew Samwick

This conjecture from Jim Pethokoukis would be shocking if it comes to pass:

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:

Posted by Andrew Samwick

I hate the idea of salary freezes.  In one sentence:

If you freeze salaries, then only the people who don't deserve a raise get the raise they deserve. 

Everyone else gets less, and the discrepancy is widest for the most productive people.  Who decided this was an effective personnel policy?  Why is it that when institutions are strapped for cash, they pay less attention to how they allocate their resources?  When cash is scarce, we should spend our money more intelligently.  What is intelligent about a compensation policy that fails to differentiate based on performance?  Reduce staff.  Set the baseline raise at a negative number.  Do something, but don't force those who merit additional compensation to subsidize those who don't.

Here's the relevance today.  The first two paragraph's of Scott Wilson's Washington Post article on the freeze on bonuses are these:

Posted by Andrew Samwick

My New Year's Plea from 2007 has been getting some attention in the recent discussions over whether cutting tax rates will raise revenue.  In this post, I'd like to follow up on the last line of that plea, which I have not seen recently quoted:

If I'm wrong, show me the evidence ... and tell me why the tax cuts were so small given their effects on revenues.

Restated, if these tax cuts raised revenue, then why not keep cutting them until the point at which revenues actually begin to fall?  I presume the reason is that none of the proponents of this line of argument have any idea what the revenue-maximizing tax rate is.  They only like to assert that we must have been past it because tax revenues eventually went up at some point after the tax rates were cut (ignoring the obvious counterfactual that it was economic growth unrelated to the tax cuts that pushed revenues higher and that they would have been even higher at the higher tax rates). 

So the next question is simply, "What do the experts on your staff tell you that the top marginal tax rate should be in order to maximize tax revenues, leaving everything else about the tax code the same?"  Journalists should relentlessly ask it of the Republican leadership in Congress who continue to make fallacious claims, and the Democratic leadership in Congress ought to ask it politely in a letter to CBO Director Doug Elmendorf. 

Posted by Andrew Samwick

I "missed" this earlier this week.  Edward Niedermeyer is anything but charged up about the Volt:

So the future of General Motors (and the $50 billion taxpayer investment in it) now depends on a vehicle that costs $41,000 but offers the performance and interior space of a $15,000 economy car. The company is moving forward on a second generation of Volts aimed at eliminating the initial model’s considerable shortcomings. (In truth, the first-generation Volt was as good as written off inside G.M., which decided to cut its 2011 production volume to a mere 10,000 units rather than the initial plan for 60,000.) Yet G.M. seemingly has no plan for turning its low-volume “eco-flagship” into a mass-market icon like the Prius.

Quantifying just how much taxpayer money will have been wasted on the hastily developed Volt is no easy feat.

Posted by Andrew Samwick

Coming up in tomorrow's Washington Post, Brookings economist Bill Gale discusses these five myths about the tax cuts passed in 2001 and 2003:

  1. Extending the tax cuts would be a good way to stimulate the economy.
  2. Allowing the high-income tax cuts to expire would hurt small businesses.
  3. Making the tax cuts permanent will lead to long-term growth.
  4. The Bush tax cuts are the main cause of the budget deficit.
  5. Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.

I recommend the whole thing.  You can look through nearly 6 years of my blogging and not find a single post in support of these tax cuts.  Whatever is left of them should be allowed to expire, and Congress should make its tax policy changes in a deliberate fashion. 

Of the five myths that Bill discusses, I continue to find the first to be the most frustrating.  Here's what Bill says about extending the tax cuts as a means of fiscal stimulus:

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Posted by Andrew Samwick

Courtesy of The Rachel Maddow Show last evening:

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