Posted without comment at Steve Landsburg’s blog.
Archive for June, 2010
oil spills
Friday, June 11th, 2010two views on fiscal challenges
Friday, June 11th, 2010Martin Wolf thinks fiscal austerity is a bad way to combat recession.
I have been fascinated – if appalled – by the pre-Keynesian approach you [chancellor George Osborne] and the prime minister have taken to the UK’s fiscal challenges. What Keynes called “the Treasury view” – that fiscal policy has no effect on activity, even in a deep recession – is alive and well in Downing Street.
In this week’s speech by David Cameron, the prime minister, on the need to cut the fiscal deficit, the word “demand” appeared just once and then only in a reference to the demand by investors for higher interest rates. The prime minister also noted of the recession, that: “It has been … a tale of two economies: a public sector boom and a private sector bust.” Does he believe that the former caused the latter? If so, he would be in a tiny minority. Does he believe, instead, that it would have been better to have had private and public sector busts, at the same time. In other words, does he think the UK needed a slump, not a mere recession?
Martin Wolf, “A question for chancellor Osborne”, Financial Times, 11 June 2010.
Columnist David Brooks disagrees, arguing that fiscal austerity promotes growth.
In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.
So we are exiting a period of fiscal stimulus and entering a period of fiscal consolidation. Last year, the finance ministers of the G-20 were all for pumping up economic activity. This year, they called on their members to reduce debt.
David Brooks, “Prune and Grow”, New York Times, 11 June 2010.
I side with Martin Wolf. The world needs fiscal stimulus, not austerity.
simple rules for drinking
Thursday, June 10th, 2010Don’t drink on an empty stomach: the main point of the refreshment is the enhancement of food. Don’t drink if you have the blues: it’s a junk cure. Drink when you are in a good mood. Cheap booze is a false economy. It’s not true that you shouldn’t drink alone: these can be the happiest glasses you ever drain. Hangovers are another bad sign, and you should not expect to be believed if you take refuge in saying you can’t properly remember last night. (If you really don’t remember, that’s an even worse sign.) Avoid all narcotics: these make you more boring rather than less and are not designed–as are the grape and the grain–to enliven company. Be careful about up-grading too far to single malt Scotch: when you are voyaging in rough countries it won’t be easily available. Never even think about driving a car if you have taken a drop. It’s much worse to see a woman drunk than a man: I don’t know quite why this is true but it just is. Don’t ever be responsible for it.
Christopher Hitchens, “A Short Footnote on the Grape and the Grain”, excerpted from his new memoir, Hitch-22 (Twelve, 2010), Slate Magazine, 6 June 2010.
Hitchens confesses that he used to abuse alcohol, but he now drinks “relatively carefully”. Each midday he takes “a decent slug of Mr. Walker’s amber restorative” [Johnnie Walker Black Label] then, with lunch, “perhaps half a bottle of red wine: not always more but never less. Then back to the desk, and ready to repeat the treatment at the evening meal. No ‘after dinner drinks’–most especially nothing sweet and never, ever any brandy.”
the dangers of deflation
Wednesday, June 9th, 2010Martin Wolf warns that fiscal tightening while unemployment remains high is apt to produce deflation, just as it did in 1997 in Japan. “Only those who believe the economy is a morality play, in which those they deem wicked should suffer punishment, would enjoy that painful result.”
A consensus is forming that policymakers should tighten fiscal policy, sharply, in countries with large fiscal deficits. Yet what makes these policymakers sure that business and consumers will spend in response to austerity? What if they find that it tips economies into recession, or even deflation?
In last weekend’s communiqué of the Group of 20 leading economies, finance ministers and central bank governors stated that “countries with serious fiscal challenges need to accelerate the pace of consolidation”.Yet the world economy confronts two risks, not one: the first is, indeed, that much of the developed world is going to be Greece; the second is that it will be Japan. ….
Premature fiscal tightening is, warns experience, as big a danger as delayed tightening would be. There are no certainties here. The world economy – or at least that of the advanced countries – remains disturbingly fragile.
Martin Wolf, “Fear must not blind us to deflation’s dangers”, Financial Times, 9 June 2010.
government finance of R&D
Sunday, June 6th, 2010Carleton University economist Christopher Maule has launched a new blog. This concise paragraph – a mini-essay, embedded in one of his recent posts – caught my attention. Professor Maule argues convincingly that government bureaucrats are conservative by nature, so are not apt to channel funds into risky ventures that pay handsome returns only if they succeed. As Chris says, “reporting annually that 95% of approved expenditures failed is not something a bureaucrat would relish doing”, even if high returns from the 5% of expenditures that succeed more than compensate the losses from failures.
Research is an activity similar to exploring unknown lands. You know generally where you want to go. You don’t quite know what you are looking for and certainly not what you will find and how long it will take and cost, but you are motivated by knowing that you might make a discovery that will be valuable to yourself , your country and perhaps even humanity – in that order. Research is an ill-defined process and the most valuable results occur more by chance than good planning. There are opportunities for private and social gain and many chances to misappropriate funds because research is difficult to monitor. Over time many vested interests arise who engage in rent seeking behavior. This does not appear to be the sort of thing that bureaucrats should be involved in given their training to monitor the prudent use of public funds with the Auditor General, Parliament, the press and lobbyists looking over their shoulders. And yet federal and provincial governments organize processes both to undertake R and D, for example NRC (the National Film Board in the cultural arena), and to fund private sector R and D through grants, subsidies and tax incentives. Administering these policies requires public servants to act more like venture capitalists by administering the use of public funds in activities where there is a less than 5% chance of success. Their training in managing the prudent use of public funds does not promote such actions. Reporting annually that 95% of approved expenditures failed is not something a bureaucrat would relish doing, especially year after year.
Christopher Maule, “Reinventing CIDA – Some thoughts”, 15 May 2010.
Comments by Christopher Maule on a presentation by economist Barry Carin and political scientist Gordon Smith, both from the University of Victoria, of their 66-page report Reinventing CIDA (Canadian Defence & Foreign Affairs Institute, Calgary, May 2010).
‘sin’ taxes
Sunday, June 6th, 2010Harvard economist Greg Mankiw explores the pros and cons of paternalistic governance.
Taxing soda may encourage better nutrition and benefit our future selves. But so could taxing candy, ice cream and fried foods. Subsidizing broccoli, gym memberships and dental floss comes next. Taxing mindless television shows and subsidizing serious literature cannot be far behind.
Even as adults, we sometimes wish for parents to be looking over our shoulders and guiding us to the right decisions. The question is, do you trust the government enough to appoint it your guardian?
N. Gregory Mankiw, “Economic View: Can a Soda Tax Save Us From Ourselves?”, New York Times, 6 June 2010.
consumption taxes and capital gains
Thursday, June 3rd, 2010John Kay discusses a burning issue in public economics, and suggests a simple remedy.
How should capital gains be taxed? Some gains are essentially indistinguishable from income – the predictable rise to maturity of a bond issued at a deep discount – but other types of gain are altogether different in character. Suppose the price of wheat rises because of a crop failure on the other side of the world. It would be unreasonable to add the increase in the value of a farmer’s property to the cash he earns from selling his products. To do so would be to tax him both on the receipt and on the expectation of it. ….
There is no simple answer to the question “How should capital gains be taxed?” …. So there are as many different regimes as there are national tax systems ….
But the most objective test of how much capital receipts enhance taxable capacity is to observe what people do with them when they receive them. That is why the best answer to the question is taxation of consumption rather than income.
John Kay, “The issue of capital gains need not be so taxing”, Financial Times, 2 June 2010.
Taxation of capital gains is difficult mainly because some types of capital gain ought to be taxed lightly or not at all. This has unintended consequences because taxpayers can ‘game the system’, classifying income as a lightly taxed capital gain. In addition, it is not easy for governments to collect taxes on unrealised gains. With consumption taxes, capital gains are fully taxed as they are spent. I have never fully understood why simple consumption taxes have not replaced complex income tax codes around the world.
