May 27, 2011
Economic Underpinnings of "The House Republican Plan for America’s Job Creators"
Such as they are
In reading this short document (a word count was 2069, essentially a 8 page paper, shorter than the term papers I assign), I was pervaded by a sense of déjà vu. There are many interesting assertions (not a single footnote in the entire document). Rejoinders to some assertions are here. I’ll focus on some key guffaw-inducing assertions, relying largely upon previous Econbrowser posts.
From the Republican plan:
... At a combined state and federal rate of just over 39%, the U.S. currently has the second-highest corporate tax rate among the developed nations of the world (those in the OECD). The U.S. federal rate of 35% is nearly 10 percentage points higher than the average of our competitors.
Although the United States' statutory corporate tax rates are among the highest of those in OECD countries, they are comparable with the statutory rates imposed by other members of the Group of Seven (G7).
How effective marginal corporate tax rates in the United States compare with other countries' rates depends on the type of corporate investment being made and the way in which it is financed. Corporate investments are financed by either shareholders or lenders (which include corporate bondholders). Compared with the average effective marginal corporate tax rates for shareholder-financed investment in machinery among all other OECD countries, the United States' rate is slightly higher; compared with the average among other G7 countries, the United States' rate is about the same. Compared with the average rate for shareholder-financed investment in industrial structures among all other OECD countries, the United States' rate is significantly higher; however, the United States' rate is close to the average among other G7 countries. In contrast to rates for shareholder-financed investment, the United States' effective marginal corporate tax rate for lender-financed investment in machinery is low by comparison with the average for other OECD countries and for other G7 countries. From an international perspective, although the United States' effective marginal corporate rates for shareholder-financed investments are higher than the average, such rates for investments financed by a combination of shareholders and lenders may be lower than the average if a sufficient fraction of the marginal investment is financed by lenders.
One line from the Republican solution struck me as interesting: "We will set the top tax rates at no more than 25% for job creating businesses." Does this mean they will allow higher tax rates for businesses that are experiencing net job losses? That sounds a bit like industrial policy.
The Republican view is that passing trade agreements with Panama, Colombia, and South Korea are the solution.
Background: The independent International Trade Commission has estimated that implementation of the three pending free trade agreements would increase U.S. exports by more than $10 billion – an increase that according to the Obama Administration, would create over 250,000 jobs.
I’m for liberalizing trade, and if an FTA truly does liberalize trade (see here), then that makes sense. But one should keep in perspective what $10 billion represents. In 2011Q1, US exports were $2.02 trillion, seasonally adjusted at an annual rate. In other words, that $10 billion represents 0.5%. It’s a substantial number in absolute terms, but hardly likely to have anything near a noticeable effect the US trade balance. The impact on exports is shown below:
Figure 1: Exports, in billion $, SAAR (blue line), and adding $10 billion to 2011Q1 exports. NBER defined recession dates shaded gray. Source: BEA, 2011Q2 2nd release, GOP, NBER, and author’s calculations.
The red triangle illustrates what would happen if in 2011Q1 exports were suddenly $10 billion higher. In reality, the $10 billion increase would take place years in the future.
The report is remarkably silent on what would be a very effective route to greater macro competitiveness, namely continued dollar depreciation.  . But given the Republicans difficulty with the economic history of international finance,  I am not surprised.
From the GOP plan:
Since President Obama has taken office, American energy production has been halted and the average national price of gasoline has doubled. The rising cost of gasoline and dependence on foreign oil mean less money for families struggling to make ends meet and for business owner who are trying to get our economy moving again.
... House Republicans are taking immediate action through our American Energy Initiative by passing bipartisan legislation to expand energy exploration and production. This will help create American jobs, grow our economy, and enhance our security.
The American Energy Initiative entails accelerating offshore exploration, leasing and drilling. It is correct to say energy prices (gasoline, oil) are higher than when President Obama took office. It is also correct to say that April prices are below peaks reached under President Bush, as indicated in Figure 2.
Figure 2: Gasoline price (all formulations), $/gallon (blue line, left axis), and petroleum price (WTI), $/bbl. (red line, right axis). NBER defined recession dates shaded gray. Dashed line at 2009M01. Source: St. Louis Fed FREDII.
I wondered about the statement that "energy production has been halted". That can’t literally be true, so I’ll chalk that up to some literary excess (along the lines of "death panels"). Here’s some actual data.
Figure 3, drawn from EIA, "How dependent are we on foreign oil?" Energy Brief, Nov. 29, 2010.
That figure shows an upward trend in production in 2009. More up to date data shows the trend continuing.
Figure 4: US crude oil production, in millions of barrels per month (blue line), and twelve month trailing moving average (red line), 2000M01-2011M03. Dashed line at 2009M01. Source: Energy Information Administration/Department of Energy.
In other words, the quoted passage is factually incorrect.
More fundamentally, the implicit argument that increased US oil production by tapping offshore sources would have an appreciable impact on current oil and gasoline prices is problematic, to say the least. In this post, I lay out the reasons why immediately allowing more offshore exploration would not lead to an appreciable impact on (globally determined) oil prices.
Spending and the National Debt
From the Republican plan:
The federal government is spending and borrowing so much that the United States will soon go broke. ...
President Obama and congressional Democrats have overseen the largest budget deficits in the history of the U.S. In the last two years, non-defense discretionary spending has increased by over 80%. ... To create jobs and save our country from national bankruptcy, we must stop spending money we don’t have.
We will work to control the federal deficit to assure investors and entrepreneurs that our nation’s elected leaders are finally getting serious about paying off the debt over time and will bring back confidence by supporting long-term economic growth. House Republicans have already begun to reduce spending in a meaningful way by approving legislation to decrease spending for the rest of the year and adopting a budget that reduces government spending by almost $6 trillion over the next ten years.
To begin with, I think it useful to put into perspective the debt accumulation over time.
Figure 5: Federal debt held by the public as a ratio to nominal GDP (blue line), and as a ratio to potential GDP (from CBO). Vertical dashed lines at 1992Q4, 2000Q4, 2008Q4. Source: St. Louis Fed FREDII, and CBO Budget and Economic Outlook (January 2011).
Not only did debt to GDP rise by 11 ppts (8.3 ppts as share of potential GDP) over the Bush administration (from 2000Q4 to 2008Q4), the trajectory was reversed -- from declining debt/GDP to rising.
The $6 trillion reduction is, I believe, an allusion to the Ryan Plan. The return of the magic asterisk in the Ryan plan, which makes a lot of the math work, is discussed here. The heroic economic assumptions necessary to achieve these targets have been discussed here, here, and here. As Econbrowser readers might recall, Heritage has never rebutted the charges of implausible estimates leveled by me, as well as Macroeconomic Advisers.
Posted by Menzie Chinn at May 27, 2011 07:17 PMdigg this | reddit
Wow! How luck was Clinton? No recessions during his actual terms. Then along comes Bush with book end recessions during his terms.
Let's make Bush 1/2 as lucky as Clinton and remove the exogenous impacts of 9/11 and the 01 recession, what can be seen is a spending/debt maintained at the incoming low level, and in near lock step with economic (actual and potential) growth. What a novel way to budget!
Another thought experiment using the above assumption is the budget would have stayed balanced, at least nearly balanced, oscillating around the GDP growth rates.
Here's another thought experiment. Leave the 01 recession and 9/11 exogenous events, but delay the "Big Recession" by two years and we can see that the budget actually gets back to balanced, with perhaps an small surplus. What a novel way to budget!
For all the Bush bashing, by the time this president ends his term(s), those terrible/horrible/Gawd Awful old Bush budget results will look fantastic.
Of course there are those who disbelieve the value of Bush's budget policies, and propose doubling sown on the the policies that created the last two years of the above chart.
Everyone have a Happy Memorial Day!
Posted by: CoRev at May 28, 2011 05:23 AM
as usual a real fine pounding mc
you are a uniquely effective
Posted by: paine at May 28, 2011 05:39 AM
The report accuses House Democrats of blocking the trade deals with with Panama, Colombia and South Korea. As Seth Meyers would say, "Really?" Last time I checked the Democrats were in the minority and John Boehner was Speaker. Unlike the Senate, the House does not allow the minority party to block anything. Let's give this whopper one of CoRev's big "sheesh!" comments. I'm a free-trader, but the truth is that both parties are protectionist. On the other hand, given the size of the output gap it's not clear to me that free-trade would do much to improve the employment situation and it could make things worse. Approving the trade deals would be good over the long run, but I don't see any particular urgency for it. And it won't increase job growth.
Setting aside all of the goofy, unsubstantiated and factually incorrect statements, what's really interesting about this pamphlet is that it betrays a thread of economic misunderstanding that is shared by many of the conservative posters here. Rich Berger and CoRev are great examples of people who do not understand that economics is all about supply and demand curves. This GOP brochure reflects the same misunderstanding. They completely ignore the weak aggregate demand curve and assume all of our problems would go away if we just found ways to lower wages, cut costs, cut regulations and cut taxes. It's all about pushing out the supply curve because in their heart-of-hearts they are all deep believers in real business cycle "economics." They're all still living like it's 1979. And the brochure is intended to appeal to exactly those folks who are attracted to RBC explanations. Why anyone still takes RBC seriously is beyond me. Even the title of the brochure refers to small businesses and entrepreneurs as the nation's "Job Creators," as though output is only determined by one curve and there can never be an output gap!!! This isn't serious economics in the sense of being a term paper that Menzie is likely to grade in one of his econ classes. Instead it's a puff piece intended to flatter GOP supporters by perpetuating the myth that they are the true hope for America. It's intended to reinforce false consciousness in the heads of small-businessmen and entrepreneurs. Sadly, they will fall for it hook, line and sinker.
Posted by: 2slugbaits at May 28, 2011 05:43 AM
you misunderstand republican-speak: when they say "We will set the top tax rates at no more than 25% for job creating businesses," they don't mean "we will have a lower rate only for firms that post net gains in employees." in republican-speak, "job creating businesses" is a tautology designed to emphasize that businesses by definition (to them) create jobs and therefore all businesses are entitled to a lower tax rate. it's not a qualification; it's a term of art to soften the sound of "We will set the top tax rates at no more than 25% for business," which is, of course, all they mean.
Posted by: guy in baltimore at May 28, 2011 05:45 AM
I have testified for the American Energy Initiative in Congress. Regarding oil production: The moratorium in the Gulf looks to see crude oil production falling there by 600 kpbd by Sept. 2012, compared to May 2010 (immediately post Macondo), according to the EIA.
I routinely ask about attitudes when I am in Houston, where I both visit clients and present regularly on the confernce circuit. Without exception, every industry professional I have talked to believes the Obama administration would close the Gulf if it could. I have been stating publicly in my presentations for more than a year that the administration would be under pressure to open the Gulf, and I believe that is proving correct.
US production otherwise is supported by shale oil in North Dakota, where federal ownership of land in minimal. In next door Montana, where shale oils were first developed, production is minimal and federal land ownership is high.
And Jim has made his own case for the Keystone XL pipeline.
As for Alaska, Shell's air permits were held up because, if I read the press correctly, an ice breaker would pass within 70 miles of a small village. I have stateed in my more recent presentations that Alaska will be wide open in 2012/2013 because of the comments I made your previous post.
So if the administration is pro-oil and pro-shale gas, well, let's see it.
Posted by: Steven Kopits at May 28, 2011 07:35 AM
As regards policy analysis:
One of the things that worries me is that I do not perceive a strong policy analysis capability in Congress. They are pretty clueless about energy, which I why I decided to hold a teach-in there in February.
I fear this is part of a broader trend in which the role of government is eroded by a focus on transfer payments rather than provision of common public goods.
For example, I invited an economist out to lunch from the DOE, and she demurred (maybe because she reads my comments on Econbrower!). But my wife (an Rutgers employee, ie, indirect NJ state employee) pointed out that this economist may not be able to accept a lunch from me due to ethics considerations. So the focus in government is on not making mistakes rather than increasing contacts, access to information, and relationships to help build strategies.
Our firm controls more statistics about offshore oil and gas services and technologies than any other firm in the world, and an economist from DOE can't have lunch with me? Who would want to work for an organization like that? The whole approach to business is completely outdated.
You know where you work if you're a good policy analyst? At Goldman Sachs, doing equity research. Or at Hess Oil in the strategy group. The skills are largley similar. So it seems government has lost a critical capability, and in effect, is outsourcing policy to "privateers" like Jim and myself, to the extent we're able to assist.
So you may be unhappy about Republican policy. I am unhappy that decisions with effects in the tens to hundreds of bilions of dollars are not receiving the quality, impartiality and timeliness of support requried.
Posted by: Steven Kopits at May 28, 2011 07:51 AM
CoRev Let's make Bush 1/2 as lucky as Clinton and remove the exogenous impacts of 9/11 and the 01 recession, what can be seen is a spending/debt maintained at the incoming low level, and in near lock step with economic (actual and potential) growth.
That's the kind of misinformation you get when you listen to too much Neil Cavuto and you don't bother to check the OMB historical tables or the CBO numbers. The on-budget deficit was not closing before the recession. When Bush took office there was a small surplus on the on-budget side of things. Even before the recession there was a permanent (i.e., structural) on-budget deficit of almost 5% of GDP even assuming there was not recession under the assumption that the Bush policies would be extended. So learn the facts and turn off Fox Noise.
Steve Kopits The DOE economist most definitely could not accept a lunch invitation if you paid for it. That's absolutely prohibited. When I visit contractors I am not even allowed to accept a free cup of coffee. Government rules require us to leave money at the coffee pot even if it's in a styrofoam cup...although EPA would probably discourage the use of styrofoam. If you don't buy the lunch and you only invite someone from DOE to join you, then that would be okay provided there was no appearance of impropriety and provided the same courtesy was extended to other private sector consultants. But in any event the economist wouldn't be able to use any of the information learned over the lunch date because that could create an "anti-deficiency" liability if you later came back and demanded compensation for the information. It doesn't matter if you provide it freely; if the information has economic value then the government must pay for it. It's the same reason why I cannot volunteer to work for free during a government shutdown.
I agree that there is not a lot of policy analysis capability in Congress. Rep. Paul Ryan's plan is a good case in point, as is the "plan" that Menzie talked about here. I'm an operations research weenie with the Army, so I have a fair amount of contact with Hill staffers. Some of them are well informed, but those are mostly folks who are career staffers. The young gun Republican staffer types that are full of ideology and on the fast track to political careers are hopeless, not to mention clueless. I don't doubt that it's the same in other parts of the government.
Posted by: 2slugbaits at May 28, 2011 09:23 AM
But it's got size 18 font and nice glossy graphics that take up half a page, so it has to be a very serious plan, right?
According to Ezra Klein here's what David Autor thought about it:
'It was, as MIT economist David Autor told me, a classic case of "now-more-than-everism": Everything on the agenda was also on the GOP's agenda in 2006, in 2002, in 1987, etc. It's lower taxes, less spending, fewer regulations, more trade agreements, more domestic oil production...there's "no original thinking here directed at addressing the employment problem."'
Sounds like "Now, more than ever" may be shaping up to be the Republican campaign slogan for 2012.
Posted by: Mark A. Sadowski at May 28, 2011 10:37 AM
I left out the best part. Here's David Autor giving clear step by step instruction on how to do "now more than ever":
“Here’s how it works,” Autor wrote in am e-mail. “1. You have a set of policies that you favor at all times and under all circumstances, e.g., cut taxes, remove regulations, drill-baby-drill, etc. 2. You see a problem that needs fixing (e.g., the economy stinks). 3. You say, ‘We need to enact my favored policies now more than ever.’ I believe that every item in the GOP list that you sent derives from this three step procedure.
“That’s not to say that there are no reasonable ideas on this list. But there is certainly no original thinking here directed at addressing the employment problem. Or, put it differently, is there any set of economic circumstances under which the GOP would not actually want to enact every item on this agenda? If the answer is no, then this is clearly now-more-than-everism.”
So, there you have it, folks. In just three easy steps, you too can be engaging in "now more than ever". (How's that for long distance learning?)
Posted by: Mark A. Sadowski at May 28, 2011 10:51 AM
You highlight the problem exactly.
I was at a conference in Houston, and I met a terrific guy there from one of the national labs. We were standing around chatting in a group, and one of the group suggested, "Hey, let's go to dinner." So we all went, and a lawyer from some firm there picked up the tab. I'd never met him before or since, and he had no idea who I was. Dinner was probably $800 for eight of us, really no big deal in the corporate sector. The poor nat labs guy had to pay his own bill, maybe $100, and all of us knew his per diem didn't cover it. It was awful. Genuinely humiliating for all of us.
So is this nat labs guy a child of a lesser god? Is he a second class citizen, someone who can't come out and play with the kids on the street? It's terrible. And it makes government seems—no, it makes government—second class.
But the government is handling issues two to three orders of magnitude greater than, say, Goldman Sachs does, on a typical day. Why is it that the more important entity has substantially weaker resources and less ability to interact with market participants? How does this play in the internet age, when turn-around times have to be fast?
It should be just the opposite. Working for the government should be the most prestigious and well-paid place to work in the country. But it’s not. Why not? Because there’s no profit motive. In the private sector, we have to balance costs against revenues, Type I statistical errors versus Type II statistical errors, if you’ll have it.
There is no measure of opportunity cost (Type II errors) in government. If Californians pay twice as much for electricity as they should, no one in government gets fired, no one’s wages are reduced or bonus withheld. On the other hand, if BP blows out a well, then clearly everyone at MMS is corrupt. Absent a motivation to maximize the productivity of scarce resources (what economics is all about), the emphasis falls to the prevention of mistakes, for example, avoiding the appearance of impropriety. Thus the emphasis is put entirely on Type I errors, and with this, the government is doomed to being second class, because I can’t buy a sandwich at Subway for a DOE economist. (Frankly, she could buy me a sandwich at Subway. That would work, too, except they lack the budget.)
The last place I saw this was working in Eastern Europe in the 1990s. Absent a profit motive, employees become a liability, potentially evil. In the eyes of management, they are bad. Clearly, the presumption is that this economist would sell out her duty for as little as a sandwich! Are government employees really so lacking in any sense of professionalism or obligation? How demoralizing to work in this environment.
In the modern world, which is open, fluid and collaborative, this means of managing people puts the government at a substantial disadvantage and results in bad policy--not due to ideological considerations--but because analysis is incomplete or uniformed.
Posted by: Steven Kopits at May 28, 2011 12:00 PM
Sorry, Steve, but I don't want my civil servants hobnobbing with "market participants." That is how regulatory capture occurs. If you want to make your views known, do it in public in full light of day -- testify before committees, make conference presentations, publish papers, write on your blog. But civil servants having dinner and drinks with "market participants" -- uh, uh. You guys have your agenda and your policy preferences and would dearly love to bend the ear of government employees. I can't wine and dine civil servants to push my agenda and neither should you.
Posted by: Joseph at May 28, 2011 02:07 PM
Steven, I'm having trouble understanding where your 600k number comes from.
Posted by: Jonathan at May 28, 2011 02:20 PM
Mark A. Sadowski I'm becoming more and more convinced that there is something about the conservative mind that resists conditional thinking. As you pointed out, we see it in economic policy all the time. And poor Menzie struggles with trying to explain conditional forecasts to the usual suspects. But we also see this same craving for a single guiding principle in other aspects of life. For conservatives the worst thing you can call someone is a moral relativist. They just can't deal with idea of there not being a single absolute truth. They shun situational economics as much as they shun situational ethics. This inability to think conditionally seeps into the conservative mind in all kinds of unexpected ways. For example, lately at work I've become a big proponent of incorporating various flavors of GARCH parameters in order to capture conditional risks in Army logistics models. The math is straightforward, so everyone understands the formal aspects, but I've noticed that those who are the most politically conservative seem to struggle with the intuition. They get the math, but not the intuitive idea of conditional risk; they always want to regard risk as unconditional. It must be something deep down in the primitive part of the conservative brain.
Posted by: 2slugbaits at May 28, 2011 03:58 PM
This is a start, but I hope they can follow through. We have far more government than we need.
Posted by: Rich berger at May 28, 2011 06:58 PM
Most the short term oil numbers I use come from the EIA's STEO. You can find the spreadsheet on this website: http://www.eia.gov/steo/
On the right hand side you'll see the phrase "All tables in a single Excel file". That's where the current STEO is, which is issued every month around the 10th. It is a great resource.
On tab 4a of the spreadsheet, you can see the breakout for US production by month. The line in question is "Federal Gulf of Mexico". This represents the vast majority of Gulf production.
In May 2010, just post Macondo, production was 1.71 mbpd; in Sept. 2012, it's forecast at 1.13 mbpd. The difference is 580 kbpd, about 10% of US crude production.
As two experts from the EIA described it to me, the drop is primarily the result of the nature of US GoM wells. There is a huge initial surge (recall the Macondo well videos), but this subsides within 12-18 months. Thus, if you stop drilling you get a large initial fall off, and that's why production drops preciptiously in the next year, as the EIA folks explained it to me.
And I didn't even take them out to lunch.
Posted by: Steven Kopits at May 28, 2011 07:59 PM
I think there's a balance. And yes, you can get regulatory capture. But how exactly a technical analyst working at the national labs or a DOE economist is going to get captured is beyond me. Neither of these folks are in procurement, to the best of my knowledge. And if someone can get captured by having dinner, then our system is in serious trouble.
It is your restrictive view of government which has killed policy analysis, because today, people have so many interesting work options. Really good people are expensive and they demand good working conditions. They're not prepared to concede that they are somehow second class and not allowed to enjoy a dinner with other professionals in their industry, just because they work for the government.
In your world, people who can't get a job with JP Morgan work for the government. In my world, it's just the reverse.
Posted by: Steven Kopits at May 28, 2011 08:52 PM
Rich Berger: maybe you didn't get the memo? :')
Don't worry; be happy...
Posted by: Babinich at May 29, 2011 04:48 AM
Slug says the following about conditional thinking:
It must be something deep down in the primitive part of the conservative brain.
Yeah,must be an affliction of the conservative mind. Lord knows the liberal mind is free thinking and progressive.
Regarding the three trade agreements the bunch in the White House are considering: POTUS is willing to risk gains from free trade in order to reward individuals, often union members, who are impacted by the new goods and services imported into the United States.
How will this cash for votes work? As all things do: raising taxes. Sure the "best and the brightest" in the WH will do their best to spin all these actions as debt reduction. These lies just mask the problem. Debt is not the problem spending is.
Keep buyin' those votes.
Posted by: Babinich at May 29, 2011 05:15 AM
Here’s how it works for Dems. 1. You have a set of policies that you favor at all times and under all circumstances, e.g., tax increases on the productive elements of society in order to redistribute income to liberal moochers, more regulation so Dems can crawl deeper in bed with Wall Street, no new drilling, higher government spending, protect unions at all cost (dictate to business where it can operate in the US, etc.) 2. You see a problem that needs fixing (e.g., the economy stinks). 3. You say, ‘We need to enact my favored policies now more than ever.’
Obama has demonstrated that every item in the DEM list derives from this three step procedure. And the result? the economy still stinks.
What to do now? Invent bogus economic argument like jobs saved (i.e., throw crap against the wall long enough in the hope that some of it will stick). And when all that Dem bull keeps sliding down the wall faster than the Obama economy is tanking, count on folks like Menzie and slugbit--the Barnum and Bailey of Keynesian economics--to cover for the abysmal Obama/Dem economy by attacking any set of policies foreign to their biased view ... all while talking about the critical thinking skill of conservatives...in the hope that a Dem sucker will be born every day....!
Power to the unions!
Posted by: Larry the Cable Guy at May 29, 2011 07:01 AM
There is no question that small business hiring is being stifled by the burden of complying with government regulations which have grown more under the current administration than any other since FDR. Small businesses are less able to see what is coming down the pike next, and this heightened uncertainty about the future business climate per-force raises the hurdle rate for expansion via new projects, the outcome of which is inherently uncertain due to the nature of the capitalistic system which entails business people committing their personal wealth – either owned or borrowed – for an outcome which by the very nature of what we mean by the future simply cannot be known in advance other than imperfectly. In deciding whether to expand (and therefore hire), the businessman-entrepreneur sees in his mind’s eye, however clearly or vaguely, some implicit yield that must be achieved to cover the normal opportunity cost expense of the sum invested as well as an expectation of potential loss if the project does not turn out as hoped. You can think of the spread between risk-free Treasuries and BBB-rated junk bond yields to grasp that there is an analogous premium between the yield on safe status quo commitment of small and mid-size business capital and the future yield stream on far riskier (but also potentially more profitable) commitment in new (job creating) as-yet-unproven projects that must incorporate along with normal uncertainty the government-driven component of uncertainty. This latter element of the most important spread in the economy is very real. Under the Obama administration uncertainty has increased considerably in magnitude. Not the least of which uncertainty is – having seen the push for Obamacare and cap-and-trade and tax-the-rich – who knows what looms next if this administration and its regulatory ramp-up is extended another four years. And this is the likelihood. Businessmen instinctively understand this and are acting accordingly. But no economist has ever measured government-driven uncertainty; it is nowhere to be seen in the economists’ workhorse IS-LM model; and it is a classic case of drunks searching under the lamppost, made even worse by them being the ones giving the advice to the passersby.
Making the tax code flatter, fairer, and simpler would unarguably enhance productivity and efficiency and lead to greater job growth because the most important resource in small and mid-size businesses – the owner-manager’s time – would be freed up for the far more vital tasks of management, product development, analysis of the marketplace, sales, and so forth. All of which would lead to more hiring. Reducing corporate tax rates to make America more competitive is a complex issue with many pros and cons. The economic impact is not likely to be large because of the many offsetting factors, and because other countries will adapt to what the US does, just as the revenue potential of raising top marginal rates on high-income individuals will be blunted by lessened work effort and creative accounting to minimize the impact of the higher rates. Just because the US top statutory corporate tax rate is comparable with the rates of other G7 members is no reason why the US rate should not be lowered. From the perspective of creating sustainable new jobs in an overall general equilibrium context that includes the effects of cutting corporate rates on the fiscal status of the government, the real question that comes up is how it would affect the offshoring of jobs. On global competitiveness, what happens regarding free trade with Columbia, Panama, and South Korea deserves little space. Bringing down the value of the US dollar would be far more job creating and this is where the focus should be. More pointedly, the House Republican plan is glaringly silent on the 500-lb gorilla, China’s manipulation of the dollar/yuan rate which spills over onto other exchange rates in Asia impacting US job creation. This blog is mostly silent on that too.
Encouraging entrepreneurship should be close to the top of the list. Schumpeter taught us the importance of the entrepreneur. Academic economists are fond of general equilibrium, but where in macro models that purport to explain growth is nourishing the entrepreneur? Nowhere. Less than 10% of the general population have the necessary drive, psychological makeup, risk-taking ability, and acumen to create and grow a business – the source of all private-sector jobs. If economists aren’t teaching the right stuff, it is sure harder for politicians other than those who have been in business to learn it. The House Republican plan pays lip service only, its three specifics of patents, visas, and FDA product approval have about as much gravitational force on entrepreneurship as the smaller planets of our solar system have on the sun.
Next the proposal to maximize domestic energy production. It’s absolutely vital to do so for well-known reasons including but not limited to the drain on our nation’s purchasing power of the petroleum import bill. It is evident from peak oil on the supply side and China’s growth on the demand side that the price of crude oil (and by substitution the price of natural gas) is on an ever-upward escalator. All the more so since the ongoing catastrophe in Japan means that nuclear is now dead. History from tallow candles to LED lighting teaches us that the technology will sequentially move on to renewables. But the vast majority of experts in the field, as well as forecasts by the Energy Information Agency, believe it will be decades long in transition. In its Annual Energy Outlook 2011, the EIA says the renewable share of total energy use will increase from 8 percent in 2009 to just 13 percent by 2035. And that’s with heavy government subsidization. All the talk in Washington about creating green jobs is ephemeral wishful thinking, it misguides the public, and the House plan rightly does not go down that route.
Finally, House Republicans want to reduce federal spending by $6 trillion over the next decade. The stated problem is the national debt. But beneath the surface what is really going on is a debate about the proper size and role of government. None of us are free of our own personal bias in this matter. Republicans want to cut the deficit by cutting spending; Democrats by raising taxes though this is somewhat of a simplification. Each come at it from a different set of values. The America public will ultimately be the ones who decide at the voting booth in coming elections. Our job is not to demagogue but to lay out the facts as best we see them so people can make better-informed decisions. One of the most salient facts not well-known at all by the general public comes out of the rock-solid work by Reinhart and Rogoff. Across time and across countries they found that when debt as a share of GDP exceeds 90% the real growth rate of an economy is in jeopardy of falling by a full percentage point. Economic growth is the source of all else. Economists’ models as manifestly deficient as they are – note there is a deficit here too, and I wonder what the implicit cumulative debt looks like! – are only a vague and imperfect guide to what should be done. You need look no further for the manifestation than the great forecasting miss going into the Great Recession, and the many omitted variables like entrepreneurship, etc. etc. While it falls short, the House Republican plan does contain much economic sense that most businessmen would agree with in contrast to many academics and politicians who have different axes to grind. Though in the case of politicians at least we can say they are representing their constituents, and that is as it should be.
Posted by: JBH at May 29, 2011 08:16 AM
JBH There are a lot of fallacies in your long, but unpersuasive epistle. Let's begin with your assertion that somehow businessmen have a deeper understanding of macroeconomics than academics or politicians. I'll grant you the politicians part, but you're dead wrong about academics unless you are only talking about RBC economists. They're hopeless. But businessmen tend to think that what's good for their piece of the economy is good for the whole economy, and that's just wrong. Fallacy of composition.
I see that you're also one of those unfortunates who believes economics is all about one curve and one curve only...the AS curve. This probably explains why you think businessmen have a deeper understanding of economics than anyone else. News flash: it takes two curves, AD and AS. In normal times we should focus on policies that push out the AS curve; but one of the historical realities is that frequently advanced market economies tend to be unstable and fall out of an equilibrium path. Shocks cause businessmen to cut back & hunkerdown. Shocks cause consumers to spend less and save more. All of those responses are rational at the micro level, but if saving exceeds investment, then the economy adjusts by reducing income, which reduces output and jobs. Modern economies are prone to this. It's called a shock to AD. So businessmen follow strategies that, from their perspective, make sense. And they tend to believe that government should follow the same strategies...cut back and save more. But if government doesn't soak up excess saving, who will? No one. That's the part that businessmen don't understand. A strategy that's good for an individual business is not necessarily good for the economy as a whole. This is yet another example of the inability of conservatives to understand that the appropriate policy response is relative and conditional, not absolute and constant for all players. In normal times it's good to push out the AS curve, but when thinking about economics you should always have those AD and AS curves in the back of your mind. What happens to the AD curve in a liquidity trap? As Krugman and James Tobin point out, in the absence of positive interest rates the AD curve is likely to be locally upward sloping, and that means pushing out the AS curve can actually reduce output. The Fisher effect overwhelms the Pigou effect when interest rates are not positive. GOP policies are counterproductive in a liquidity trap.
As to business climate uncertainty, this is a howler. What could be more disruptive to certainty than GOP threats to allow the Treasury to default? What could be more disruptive to certainty than to perpetually threaten government shutdowns? Healthcare reform is already law, so there isn't any uncertainty about that. If there's uncertainty it's coming from GOP efforts to try and change existing law. Same with Social Security and Medicare. It's the GOP's call for major changes to those programs that is causing uncertainty. But the one area where big businesses are crying the most is in financial reform. But notice that the reforms do nothing other than restrict economic rents that businesses are able to capture from producer surplus. Taxing rents has no effect on output, so that really doesn't explain things.
But nice attempt though. Please come back and try again.
Posted by: 2slugbaits at May 29, 2011 10:03 AM
The Econbrowser team is apparently devoted to defending the sanctity of traditional academic demand side economics. They chortle when their political opponents talk about incentives relating to the production of economic values. As my graduate school Keynesian economics professor said: production is easy and automatic, it's demand that economists need to worry about.
If all that academic economists can produce is snarky political ripostes like little Krugman Jrs, then it's time to terminate the profession.
Posted by: A.West at May 29, 2011 10:03 AM
While reading my local newspaper's account of how local congressmen voted, I was reminded that the Obama budget lost 97-0. On the other hand, the Ryan budget got 40 votes. This is a battle worth fighting. Unlike FDR, the only thing the Dems have to offer is fear.
Posted by: Rich Berger at May 29, 2011 04:57 PM
As to business climate uncertainty, this is a howler.Not the least bit funny in the business world where the producers operate.
The article below was posted in October 2009
The business I own has been growing at about 10% a year for the last five years. In each of the last 3 years, we have invested an average of a half million dollars in new facilities. In the past five years I have added over a hundred new positions in the company.
This year we will add ZERO. I just cannot put up any more capital in this environment.
The legislative risks we face are tremendous. My two highest costs are labor (50% of revenues) and fuel and electricity (about 10% of revenues). Thus, nearly 2/3 of my costs are going to be increased by the current health care bill and cap-and-trade bill. The only question is how much.
In a business with thin profit margins, there just isn’t much, uh, margin for uncertainty.
Posted by: Duracomm at May 29, 2011 05:59 PM
As to business climate uncertainty, this is a howler.
slugbaits might find uncertainty entertaining but business owners making hiring decisions do not.
Mr. Pearlstein is absolutely right. As CEO of my company, I am out of creativity. I will give you an example.
The new health care law appears (the implementation is still hazy) to impose a $2000 penalty per employee for not having a corporate health care plan (all my employees are retired, so they already have health care plans, but that does not affect the penalty).
With a bit over 400 employees, that makes the penalty something north of $800,000 a year. This is larger than my annual net income.
And Mr. Pearlstein is correct — I am absolutely at a loss as to how to deal with this, which just proves his point that all we CEO’s have an appalling lack of creativity.
Posted by: Duracomm at May 29, 2011 06:16 PM
Duracomm Your CEO is too stupid to run a company. First, there is no cap-and-trade law, so this clownshow clearly doesn't know what he's talking about. Second, if (as he believes), his two highest costs are labor and energy, then perhaps he should learn about elasticities of substitution. The cost of capital is near zero and if his labor and energy costs are going up, then maybe he might want to think about substituting capital for labor and energy inputs...unless he's like a lot of closet Marxist businessmen who believe in Leontief production functions.
I don't know if CEOs have an appalling lack of creativity, but many of them clearly have an alarming level of ignorance when it comes to understanding macroeconomics. And evidently at least one CEO doesn't even understand basic microeconomic principles.
Posted by: 2slugbaits at May 29, 2011 07:46 PM
"While reading my local newspaper's account of how local congressmen voted, I was reminded that the Obama budget lost 97-0. On the other hand, the Ryan budget got 40 votes. This is a battle worth fighting. Unlike FDR, the only thing the Dems have to offer is fear."
Somebody forgot to send you the memo. The Senate Republicans so far have voted for three highly unpopular budgets in the past week. The Democrats have voted for none (makes for better commercials):
As for fear, as I recall it was the Republicans who were dishing out the ill founded Mediscare last fall. The things the Democrats are saying about Ryan's "plan" are all true (which is far more fightening).
And to JBH and Duracomm and all who are pushing the "uncertainty" nonsense. It may get constant coverage on Fox but most people don't get their info from Fox. Most people have eyes and can see. Even the extreme right wing National Federation of Independent Business (NFIB) finds in their survey that the "most important problem" is....drum roll...*poor sales* (duh, page 20):
Posted by: Mark A. Sadowski at May 29, 2011 08:50 PM
Struck a nerve, eh?
Posted by: Rich Berger at May 30, 2011 03:41 AM
But if government doesn't soak up excess saving, who will? No one. That's the part that businessmen don't understand.
That's not government's role. And they prove it over and over again.
Programs such as Social Security and Medicare have warped the concept of private savings and investment in a couple of different ways.
First, by diverting Social Security and Medicare taxes into current government spending.
The other way is by undermining the premise that private savings and investment are the key in providing for one’s old age.
Why save and invest when Big Brother is looking out for you?
The results of stripping freedom and responsibility from the individual?
The rate of personal savings in the United States has declined over the years, in some years falling to zero.
Posted by: Babinich at May 30, 2011 04:12 AM
Mark A. Sadowski And to JBH and Duracomm and all who are pushing the "uncertainty" nonsense...Even the extreme right wing National Federation of Independent Business (NFIB) finds in their survey that the "most important problem" is....drum roll...*poor sales*
But this doesn't fit the narrative that folks like Rich Berger and Duracomm want to hear. If the problem is weak demand, then this means the heroic stature of CEOs and entrepreneurs is in doubt. You see, they have to believe that a CEO's great success is a mark of that CEO's personal virtue and that the failures of society's riff-raff are due to an absence of personal virtues. But if success or failure is largely just dumb luck due to the level of aggregate demand in the larger economy, well that spoils the whole morality play. If you accept the idea that a business is to a large extent a hostage of larger macroeconomic forces, then how do you justify large CEO compensation packages? How can you flatter their egos by calling them "America's Job Creators," as the GOP budget plan does in its title? If business success is largely a random outcome, then how can you claim taxes are immoral because they steal from the fruits of one's own labor? How can you deny a role for government fiscal and monetary policies to correct the business cycle? No, no. None of this can be true. In the minds of Rich Berger and Duracomm business success must be earned and all glory to the entrepreneur. And if a business fails, then it must be because of too much government regulation or high taxes or "uncertainty," but never the fault of the heroic CEO not understanding the macroeconomic business cycle. It must be Obama's fault.
I hope I cleared that up for you.
Posted by: 2slugbaits at May 30, 2011 04:30 AM
Lessee, the very first recommendation is to reduce regulations/regulatory impacts especially on small businesses. And, in today's WaPo we see that Obama an his regulatory Czar agree. http://www.washingtonpost.com/politics/obama-proposes-revamping-regulations-to-aid-businesses/2011/05/29/AG2QYOEH_story.html?hpid=z4
I fully expect 2slugs and maybe even MC to macroeconomic theory for/against this move, as federal regulations have little to no effect on business decisions and spending.
In the end we will see that their reaction to be not against the regulatory policy decisions, but against the reality that their own policy beliefs are proving wro.. errh, umh, less effective than that other party's.
It's tough to admit you've been wrong in many of your beliefs, especially when your leader get's it right by following that other party's policies. Of course, you can always resort to sarcasm and ridicule, to definitively prove your obtuse theoretical point(s) versus reality-based decisions.
Posted by: CoRev at May 30, 2011 05:46 AM
CoRev as federal regulations have little to no effect on business decisions and spending.
Let me try and help you out here. No one ever said that government regulations have no impact on business decisions. Quite the contrary; that's the point of things like taxes on negative externalities. The point of those kinds of taxes and regulations is to reduce the amount of negative externalities. What you don't seem to understand is that none of that is particularly relevant to the current economic mess we're in. Again, your thinking is forever stuck in 1979. Move on, dude. This is 2011 and the central economic problem is weak aggregate demand. Tweaking regulations here and there might help this or that particular business or industry; but it doesn't do a damn thing for the economy as a whole. Too much regulation is not the binding constraint here; it's consumers not buying stuff and businesses not investing because they are already sitting on excess capacity. When and if the economy is humming along at 5% GDP growth and inflation is running 8%, then it might be a good time to talk about binding regulations. But right now it's just a sideshow intended to fool the clueless. Too bad that Team Obama is playing along with this ruse. On the other hand, my understanding is that all is not necessarily what it appears and that the Obama folks are actually using this regulatory review gambit as something of an opportunity for a double-cross. That was certainly the skuttlebutt several months ago when this whole regulatory review thing got run up the pole.
Posted by: 2slugbaits at May 30, 2011 07:22 AM
Toldja so! 2slugs explains the economics theory associated with federal regulations without realizing it was sarcasm. "...that's the point of things like taxes on negative externalities." Why not just use "impacts" in lieu of negative externalities?
2slugs also can not understand why this is just funny: "central economic problem is weak aggregate demand. Tweaking regulations here and there might help this or that particular business or industry; but it doesn't do a damn thing for the economy as a whole." Of course helping this or that particular business may add jobs. It might even add enough jobs to measurably reduce unemployment. Anyone remember 2slugs denying that team Obama, including these kinds of 2slugs' anti-business comments, have no impact on business uncertainty.
Then denial of which business friendly policies are being adopted, and which are being abandoned is fascinating to watch. 2slugs says: " my understanding is that all is not necessarily what it appears and that the Obama folks are actually using this regulatory review gambit as something of an opportunity for a double-cross. That was certainly the skuttlebutt several months ago when this whole regulatory review thing got run up the pole."
Why is trying a different approach anethama to liberals/Democrats? Because they might have to admit that they worked better than those they have built a life and career supporting.
Sad really, that lack of critical thinking and blind allegiance to political thought.
Posted by: CoRev at May 30, 2011 08:26 AM
I'll admit, I don't understand the argument on the left.
The right, as I understand it, makes sense to me. We'd like to keep the tax burden, all in, at or below 32% of GDP. Spending has to be adjusted accordingly. We can debate the means, but the goal is pretty simple.
What does the left want? Does the left want to see spending as a share of GDP rise? To what level? 36% or GDP? 40%? Why is that? To cover healthcare costs? Well, then why does Ezra Klein complain that we're spending twice as much per capita as other advanced countries? What's the goal here? Does the left want to reduce healthcare spending as a share of GDP?
Or is the goal deficit reduction? But high tax countries also have deficit problems. Countries with govt revenues 40%+ of GDP include Greece, Italy, Portugal and Iceland. Did these high rates of government spending prevent them from having large deficits?
UK and Spain are around 37% of GDP from government revenues. Did this prevent them from running large deficits?
And in the low tax group of countries are the US, Korea, Singapore and Hong Kong. Did their low taxes mean high deficits? Not for the latter three countries.
I am hard pressed to find any correlation between tax receipts and deficits. Therefore, the argument that increasing taxes will eliminate deficits is not supported by cross country comparisons.
It may be true that increasing taxes might decrease deficits in the short run. But history--and the statistics--suggest that this will only ratchet spending to a higher level, from which the budget will again fall into deficit.
Unless the left can offer some guarantee that a tax increase will permanently solve the deficit situation, higher taxes are unlikely to guarantee anything more than higher structural spending.
Posted by: Steven Kopits at May 30, 2011 08:47 AM
"All My Business Problems Diagnosed
Mr. Pearlstein is absolutely right. As CEO of my company, I am out of creativity. I will give you an example.
The new health care law appears (the implementation is still hazy) to impose a $2000 penalty per employee for not having a corporate health care plan (all my employees are retired, so they already have health care plans, but that does not affect the penalty).
With a bit over 400 employees, that makes the penalty something north of $800,000 a year. This is larger than my annual net income."
I always take comments like these with a large grain of salt. Of course, the ACA does not levy penalties in such a situation where the employees are not receiving a subsidy for purchasing HI(as would be the case where they were, as retirees, receiving Medicare). So basically the post is a lie(whether intentional or not I am not certain).
But I would love to know what kind of business has 400 full time employees that are all retired.
Posted by: EMichael at May 30, 2011 09:05 AM
On a different topic, what about the prospects for default in Greece?
This notion that international agencies will oversee Greek tax collection and the like, well, I just don't see it. I don't think the Greek psyche is prepared to become a Franco-German colony.
So my read is that the Greeks default and are out of the Euro. Or am I jumping the gun?
Posted by: Steven Kopits at May 30, 2011 09:07 AM
"Unless the left can offer some guarantee that a tax increase will permanently solve the deficit situation, higher taxes are unlikely to guarantee anything more than higher structural spending."
Do you have an example of how lower taxes have guaranteed lower structural spending?
Posted by: EMichael at May 30, 2011 09:16 AM
Babinich, Larry the Cable Guy, CoRev, A. West, and Rich Berger: Do you have anything substantive to say, perhaps with respect to defending the factual errors I highlighted in the House Republican plan? Or do you actually believe oil production has declined, and EIA is making up the data?
Posted by: Menzie Chinn at May 30, 2011 09:28 AM
Menzie asks: "Or do you actually believe oil production has declined, and EIA is making up the data?"
This statement is hyperbolically incorrect: "Since President Obama has taken office, American energy production has been halted While the following is true: "and the average national price of gasoline has doubled. The rising cost of gasoline and dependence on foreign oil mean less money for families struggling to make ends meet..."
EIA tells us that on Jan 19,2009 the average price of gas was $1.832/gal and on May 23, 2011 it was $3.982/gal.
Moreover, producing more energy in the US does add jobs and, therefore, can reduce the number of struggling families.
Menzie, was that substantive enough in defining which portion of your quote was in error? I'll let the other folks make their own points.
Posted by: CoRev at May 30, 2011 10:42 AM
Menzie, I want to thank you for the CBPP chart in the earlier article and your figure 5 in this one. They clearly confirm the hyperbole concerning the really bad, no good, terrible, awful and horrible Bush/Republican spending policies. Many of those same terrible policies are included in your referenced pamphlet.
Posted by: CoRev at May 30, 2011 11:03 AM
CoRev: Then I am correct, and you agree, that the statement re production is a factual error in the plan? Thanks for the affirmation.
Posted by: Menzie Chinn at May 30, 2011 11:04 AM
"EIA tells us that on Jan 19,2009 the average price of gas was $1.832/gal and on May 23, 2011 it was $3.982/gal."
The DJIA was 8281 on 1/16/2009, it is now over 12,000.
I cannot imagine anyone really thinks there is a direct correlation in either of those facts and the Obama Administration.
Posted by: Emichael at May 30, 2011 11:25 AM
The point I'm making is that deficits and levels of taxation do not appear to correlate well. Higher taxes (or lower taxes) are no guarantee of a balanced budget. Therefore, the argument that raising taxes will balance the budget is likely to be only temporarily true.
The IMF estimates that US govt spending will average about 41% of GDP for the years 2009-2011. Thus, spending is now 10% above traditional government receipts.
So the issue is not whether we're going to reduce government receipts. The issue is whether we are contemplating moving to a quite European level of taxation. That's what's at stake, unless someone on the left tells me the target is 32% of GDP.
I have written earlier that I believe there's principal-agent problem resulting from the three ideology model that gives democracies a structural deficit bias. In layman's terms, politicians have incentives to keep taxes low and spending high, and that means accruing non-visible liabilities in the middle. That's what the whole union uproar is about: making financial promises that mature on someone else's watch.
To counteract this tendency, politicians must be given an incentive to maximize GDP growth subject to fiscal balance. But, even in Greece, the IMF is not willing to try it; and we're not even willing to discuss it here on Econbrowser. (Here's a must-read article on Greece: http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/)
Yet, in Singapore, they do pay such bonuses. And again, if we consult the IMF WEO, we can see that by 2016, the IMF anticipates that per capita ppp GDP in Singapore will be 50% higher than in Germany. Germany will be a poor country in comparison, as will the UK--and yet that seems to be the model we want to emulate.
Germany is already poor compared to the US, only 75% of our per cap GDP on a ppp basis. But macro-performance in Singapore will eclipse us both. By 2016, the IMF anticipates Singapore will be 25% richer than the US for per capita GDP on a purchasing power parity basis. Is Singapore not the model we should be trying to emulate?
Posted by: Steven Kopits at May 30, 2011 11:45 AM
Menzie, agreed. Inaccurate and hyperbole. Now comment on the rest of the comment that is correct.
Posted by: CoRev at May 30, 2011 11:59 AM
CoRev Anyone remember 2slugs denying that team Obama, including these kinds of 2slugs' anti-business comments, have no impact on business uncertainty. Perhaps this is too fine of a distinction for you, but agreeing that regulations can impact business output is not quite the same thing as saying Obama's policies are contributing to "uncertainty," unless you and I have very different definitions of "uncertainty." The regulations that businesses complain most about are already on the books...there is no uncertainty about what they mean. Businesses may not like all of them, but there is no uncertainty. To the extent that there is any uncertainty it is being generated by the Republicans who are trying to fool business leaders into thinking that those policies will be reversed. It's the GOP that is trying to freeze business confidence because the Republicans believe a bad economy will help them in 2012. A few (relatively) honest Republicans have even been caught on tape admitting that point.
Getting back to the central issue, why don't you try drawing a few AD and AS curves on the back of a napkin. Try drawing a relatively flat AS curve (reflecting the fact that we are well below potential GDP) and an steeply upward sloping AD curve (reflecting the fact that we are in a liquidity trap and we can't count on interest rates to keep the slope of the AD curve downward sloping). Now create a second AS curve that describes what happens if you think it's 1979 and believe in supply side economics. Hint...output actually goes down. That's Krugman's point and that was Tobin's point. It's an easy exercise. Try it.
Steve Kopits Your history is wrong. Spain and Ireland and Iceland are not in a pickle because they ran large deficits. They actually had balanced budgets going into the recession. They have large deficits today because of the recession and not the other way around. Greece is a basket case because the Greeks don't want to pay taxes but want lots of services...much like today's elderly, white, GOP voter.
There is no magic number for what percent of GDP should be government spending, but it will surely grow with time because of demography. But as the CBPP numbers show, the long-run 20 year effect of the Bush tax cuts is to put us in a very deep hole. Reversing those tax cuts won't fix all of the problem, but they will make a big dent in the problem. As to Ezra Klein's article, you missed the main point. Klein's argument is and always has been that you can't fix Medicare & Medicaid without fixing healthcare; otherwise you're just cost shifting and it will end up costing more. But you can fix healthcare smart or you can fix it stupid. Klein's point is that the GOP wants to fix it stupid. See Brad DeLong for a similar take.
Posted by: 2slugbaits at May 30, 2011 12:34 PM
CoRev: But I said the part about gasoline prices was correct -- re-read the text of the original post. There is no dispute on that point. Let me quote: "A lie which is half a truth is ever the blackest of lies." by Alfred Lord Tennyson.
Posted by: Menzie Chinn at May 30, 2011 01:11 PM
2slugs' logic: "...but there is no uncertainty. To the extent that there is any uncertainty it is being generated by the Republicans who are trying to fool business leaders into thinking that those policies will be reversed. Is there or isn't there uncertainty?
In 2slug-land Obama/Democratic policy and legislation is so sound that opposition is unthinkable. Since it is unthinkable no businesses would be impacted with uncertainty of modification or reversal by an opposition effort. And that is for those regulations already on the books and not those under discussion.
2slugs seems to consider regulations complete from Obamacare. Worse 2slugs seems to forget Obama campaigned on "hope" and change, and that unknown change adds no uncertainty.
Posted by: CoRev at May 30, 2011 01:36 PM
Menzie, we seem to be circling around each other in near violent agreement.
Careful, do not go hyperbolic or even near the edge snark after this: "A lie which is half a truth is ever the blackest of lies." by Alfred Lord Tennyson." Oops! Might already be too late if I reread this article.
Posted by: CoRev at May 30, 2011 03:19 PM
CoRev Your argument is ridiculous on the face of it. If Republicans honestly believe that uncertainty is the central economic problem, then why are they working overtime to introduce more uncertainty? Why are they indifferent to the prospect of a Treasury default? Does that contribute to business confidence? Even if they believe Obama's policies are misguided, if they believe uncertainty is the big problem today doesn't that suggest they should put their policy disagreements on the backburner for the sake of business certainty? There is nothing wrong with the GOP opposing Obama's policies, but if they honestly believe that uncertainty is the central problem, then it's really hard to justify actions that increase uncertainty even if you disagree with those policies. Unless of course the GOP really doesn't care about the country and is actively trying to sabotage the economy. I'll grant you that this is a real possibility. Bottom line is that your position is a logical jumble. BTW, did you work on that AD/AS napkin scribbling yet?
Posted by: 2slugbaits at May 30, 2011 03:46 PM
House Republicans are taking immediate action through our American Energy Initiative by passing bipartisan legislation to expand energy exploration and production. This will help create American jobs, grow our economy, and enhance our security.
I believe it will create jobs. The question is what types of jobs? It may grow the economy. I am not sold at all that this action will make us more secure.
Ok, your turn... What's the Tabula Rasa's plan?
Posted by: Babinich at May 30, 2011 06:37 PM
Duracomm Your CEO is too stupid to run a company. First, there is no cap-and-trade law, so this clownshow clearly doesn't know what he's talking about.Slugbaits you would look less incompetent if you actually read the comment before responding.
The author said nothing about a cap and trade law. What he said was:
The legislative risks we face are tremendous.
Thus, nearly 2/3 of my costs are going to be increased by the current health care bill and cap-and-trade bill.
Might want to get your facts right before you call someone else a clownshow.
Posted by: Duracomm at May 30, 2011 06:45 PM
2slugs, where do you come up with some of your arguments. This makes no sense: "If Republicans honestly believe that uncertainty is the central economic problem,..." No one but you has made that point, then you argue against it. You seem to be throwing points against the wall in hopes something sticks.
You then try this gambit: "Why are they indifferent to the prospect of a Treasury default?" You know if that were to happen it would be even another clueless decision by the Obama team. It's just blind bleating by Democratic fear mongers. Are you one?
And the near continuous repetition of it does unsettle business.
Finally, you claim that the economy is being sabotaged by Republicans?!?!?!? Perhaps you have forgotten which party's economic policies under which we are laboring.
Posted by: CoRev at May 30, 2011 06:58 PM
Duracomm Your CEO is too stupid to run a company.
Second, if (as he believes), his two highest costs are labor and energy, then perhaps he should learn about elasticities of substitution.
The cost of capital is near zero and if his labor and energy costs are going up, then maybe he might want to think about substituting capital for labor and energy inputs Nice of you to acknowledge that actions like raising the minimum wage increase labor costs and makes it economically favorable to use automation technology to replace employees. Pity about the employees and the stubbornly high unemployment rate.
That stupid, clownshow of a CEO is one step ahead of you.
Update on the Arizona Minimum Wage
We are increasingly turning to automation solutions, like automatic pay systems and gates, to replace people.
... fee collection machines work 24 hours, are not subject to overtime rules, they never get hurt, they never sue us,
and the government never passes laws to increase their price.
Posted by: Duracomm at May 30, 2011 07:18 PM
Steven: I am hard pressed to find any correlation between tax receipts and deficits.
You don't need to look at foreign countries. You can just look at U.S. history. Between 1945 and 1981 the country diligently paid down its war debt and the debt to GDP ratio gradually declined. But in 1981 everything changed. Reagan passed record tax cuts and the debt dramatically increased for the first time in 35 years. Then Clinton passed tax increases and he generated the first budget surplus in decades. This was immediately followed by GWB who cut taxes to the lowest rate since the 50s and guess, what, the debt soared again and the economy tanked. So you have several tests of your hypothesis -- pre-Reagan declining debt, Reagan tax cuts and soaring debt, Clinton tax increases and budget surplus, and then more Bush tax cuts and soaring debt again. Empirical facts belie your theological belief that there is no correlation between taxes and deficits.
Posted by: Anonymous at May 30, 2011 09:41 PM
Anon (May 30, 2011 @ 09:41pm) says:
Then Clinton passed tax increases and he generated the first budget surplus in decades. This was immediately followed by GWB who cut taxes to the lowest rate since the 50s and guess, what, the debt soared again and the economy tanked.
Clinton did not pay down the national debt. Between FY 1998 & FY2001 public debt decreased but inter-governmental holdings increased above and beyond public debt savings.
Posted by: Babinich at May 31, 2011 03:03 AM
Menzie agrees with the Republicans on competitiveness even making the point that the Republicans may have understated the situation since depending on how you calculate it the US could fall from second to average.
Menzie agrees with the Republicans on manufacturing recognizing that passage of the three trade agreements would increase trade 0.5% a huge increase for the Democrat leadership of the Senate to simply allow a vote. Most Senators are anxious to vote for the agreements.
It is a little hard to understand but I think Menzie agrees with the Republicans that increasing the drilling for oil would lower the cost slightly and reduce foreign imports.
It also seems that Menzie agrees with the Republicans on spending and the national debt. He does seem more disturbed that most of the national debt problems came under the Bush administration so while he puts the Republican comments "into perspective" this seems to imply that he agrees with the Republicans.
This is really a little amazing. When do you think Menzie will rush out and register as a Republican. With such support, maybe he already is a Republican.
Posted by: Ricardo at May 31, 2011 05:11 AM
Steven Kopits wrote:
"Germany is already poor compared to the US, only 75% of our per cap GDP on a ppp basis. But macro-performance in Singapore will eclipse us both. By 2016, the IMF anticipates Singapore will be 25% richer than the US for per capita GDP on a purchasing power parity basis. Is Singapore not the model we should be trying to emulate?"
No Singapore is not the model we should (or could) emulate.
The following figures are from 2000/2009
GDP per capita (2009 dollars PPP)
GDP per hour worked (2009 dollars PPP)
Average annual hours worked per employed person
Employment as percentage of population
Note that Singapore's productivity level is 59.9% of the US level. The average number of hours worked per worker is 138.4% of the US level. And finally, note that the proportion of the population that is employed is 129.6% of the US level. So the main reason GDP per capita is higher in Singapore is that the number of hours worked per capita is nearly 80% higher.
Note also that the rate of growth in productivity in Singapore is lower. Singapore's productivity level was 66.0% of the US level in 2000. So although Singapore's GDP per capita rose by 20.9% that was mostly due to the fact that the proportion of the population working rose by 13.3%.
Why are so many Singaporans working, working such long hours, and why is that proportion increasing? Guest Workers.
Guest workers as a percent of the populstion rose from 18.7% in 2000 to 25.3% in 2009. Excluding guest workers the proportion of the population that is employed is 45.9%. I can only speculate about hours worked but anecdotally I've heard that it is not uncommon for guest workers in Singapore to work six days a week and 15 hours a day. Thus I suspect that resident Singaporans work considerably less than 2400 hours a year.
The only way we could emulate this model would be to bring in 100 million temporary guest workers each working 90 hour weeks. In my opinion that is not a sustainable model for growth.
The source of most of this data is here:
Posted by: Mark A. Sadowski at May 31, 2011 06:35 AM
I suspect that the last anonymous is mulp - he keeps pitching the idea that tax increase help the economy. IIRC Clinton passed his retro tax increases in 1993 and when the budget battle occurred in 1995, there were still $200 billion deficits off into the future. That was what the Republicans were fighting about and what they suffered for. Eventually, the combination of reduced military spending, Republican control of the purse strings and a booming economy turned those deficits into a surplus, but not until FY98 and due mostly to holding down expenditures.
BTW Menzie, you asked if anyone had any substantive comments to make. I went back to read your post, and the links and I didn't find them all that substantive. For example, the American Liberal Prospect indicates that other studies differ about the cost of regulations but isn't very specific - what I could find, from the OMB was a draft that indicated that the benefits of regulation were much higher than the costs. I thought that was amazing. If the benefits are higher that costs, why wouldn't the regulated adopt the rules without prodding? I suspect there are two answers: first, the beneficiaries are other than the regulated, second, that the benefits are calculated by the agencices and are totally unrealistic. In general, a regulation will prevent certain actions or make that action more costly - either way costs are imposed, substantial costs. Given that the Federal Register runs roughly 80,000 pages per year, the volume of regulations and the regulatory burden is immense and growing each year.
Posted by: Rich Berger at May 31, 2011 06:46 AM
You're saying that democracies don't have a deficit bias, no? Of the 42 countries monitored by The Economist, all but seven are running deficits. The exceptions are i) Norway, ii) Chile, and iii) Saudi Arabia, all major commodity exporters. In addition are iv) Singapore, v) South Korea, vi) Hong Kong. These latter three are all low tax countries. Hungary, in my issue, is also showing a surplus, but I believe that may be due to technical matters (nationalizing private pensions and such). So we can conclude that drill, baby, drill is likely to have a positive effect on the deficit, or it may be argued that low tax countries do not have a deficit bias, but everyone else does.
And can raising taxes cure the deficit? Sure. And then we're at 40% of GDP. We're copying the UK and Germany, whose GDP per capita is 3/4 of ours and lower proportionately than it was 30 years ago? That's the direction you want to go? To follow a guy who's a lap behind?
Or is it Singapore, with govt spending at 22% of GDP. I haven't read about homelessness, or a healthcare crisis or an inability to educate its population there on a mere 22% of GDP. How do they do it?
Posted by: Steven Kopits at May 31, 2011 07:01 AM
How do they do it?
Growth among the highest in the world.
Strange how changing the denominator has such a large effect.
Posted by: Emichael at May 31, 2011 09:01 AM
I think the biggest lie of this entire "Plan for America’s Job Creators" is that it has nothing to do with what creates jobs.
Businesses do not create jobs, they meet demand. Nothing happens in this country until somebody buys something, but that simple reality is ignored with this "Field of Dreams" type thinking(if you build it they will come).
Let me know of a business owner who is going to increase his payroll becuase of a tax cut and I will show you a business owner who knows nothing at all about his business. He is going to do one of two things with a tax cut; keep it or reduce his prices.
Businesses hire people when they have a job for those people to do, not because they have the money to hire people. Want proof? Check the cash levels of American corporations and job openings.
And somehow people think giving corporations more cash will creat jobs.
Posted by: Emichael at May 31, 2011 10:17 AM
Pretty funny stuff. I remember when people wrote to IBM saying we want a more powerful personal computer. Or when they implored Steve Jobs to create the Mac. Or when they asked him to invent the iPhone, the iPod or the iPad.
Posted by: Rich Berger at May 31, 2011 11:00 AM
RichB, yup! Emichael really did not have a clue about entrepreneurship. He also is unaware of where a high number of NEW JOBS are created.
Furthermore this article supports your earlier contention re: regulations costs: http://www.washingtontimes.com/news/2011/may/30/government-no-1-job-destroyer/?sms_ss=twitter&at_xt=4de4de632d8a9791,0
It says: "Taken as a whole, the Small Business Administration estimates that total federal regulatory costs in America amount to $1.75 trillion annually - a number that dwarfs the federal government’s entire discretionary budget for 2011 and exceeds Canada’s gross domestic product."
Posted by: CoRev at May 31, 2011 12:38 PM
"I remember when people wrote to IBM saying we want a more powerful personal computer. Or when they implored Steve Jobs to create the Mac. Or when they asked him to invent the iPhone, the iPod or the iPad."
And what would you describe those requests as being?
Posted by: Emichael at June 1, 2011 05:50 AM
This is not a Rep/Dem issue. This is a U.S. issue. Remember Clinton won on it's the economy stupid! We are in danger of a massive turn to the Right Wing, not because they are right, but because the Left Wing has it wrong in their current hard headed course toward an economic disaster. Ideology and economics do not mesh well, especially in a land where we still believe in the invisible hand. Most of what is in the house rep's plan is common sense. However, we must hold corps accountable. This means, if they will not do the right thing, because it is the right thing, if not, then they will not be allowed to access the Amrican market. I am conservative to an extreme and even I can see how we are getting played by both sides. Time to both cut out entitlements and corp. welfare. Let the American worker keep the fruits of their labor. No more income tax. It is just wrong! Tax the economy via a sales tax. Make the government use last years receipts for this years budgets. Never let the Government spend more than it takes in, unless the People vote in national referendum on the issue at hand. I could go on and on, but bottom line, stop the politics or be booted out. We did it here in WI and we will do it even stronger in 2012. The private worker is really mad. We will be heard from!
Posted by: Steve at June 1, 2011 09:41 AM
A view from the real world...
All I know is that demand where I work, for our core products, has not returned to trend. We are still about 25% below peak in sales. So we are really behind when you factor in lost potential growth. Hence, we have shed jobs and will continue to shed jobs. Even though our industry is highly regulated, regualtion is not an important factor - if people wanted to purchase our products we would make sure we had enough people to make them and sell them. It's really that simple. Cap and trade? Who cares. We deal with that when we have to. But if someone wants to buy our products today and we need to hire someone to make it for them and we need to buy them a desk and some equipment then we do it We do not care what may or may not happen in a year, or 5 years.
Why soft demand? Because our core customers, middle class Americans, are not purchasing. They are stressed out from decades of stagnant wages. They are unemployed during their peak earning years when, in other times, they would be purchasing our products. So it's a downward spiral. I wonder if there is anything anyone could do to intervene in such a downward spiral? Hmmm. I guess not. So we are assuming a permanent decline in the standard of living for middle class Americans and adjusting our business model accordingly.
The corporation is making good money, however. Not in our core products, and not in the USA. Stock price is hanging in there, yay!
Posted by: coginawheel at June 1, 2011 10:02 AM