Monday, June 7, 2010
Obama's Secret Wish
Journalist Fred Barnes suggests in a recent article that President Obama is secretly hoping the Republicans take control of Congress in the November midterm elections, thereby allowing him to benefit politically from a "long-awaited pivot to the center" that a GOP majority would surely force. Though Obama has arguably made a number of attempts to appease Republicans during his first year in office (such as his willingness to explore offshore oil drilling on the East Coast, his buildup of troops in Afghanistan, and his inclusion of Republican proposals in healthcare reform legislation), there is much to like about Barnes' vision of divided government. He cites spending figures that show that the presidents most effective at holding down discretionary federal outlays have been those who faced Congresses controlled by the other party. According to Barnes, "Republicans could be the answer to [Obama's] political prayers."
Sunday, June 6, 2010
Catholic Cardinal Calls for Reform
"The primary thing to consider should not be the sin, but people’s striving to live according to the commandments… Instead of a morality based on duty, we should work towards a morality based on happiness."-Austrian Cristoph Cardinal Schönborn, on his view that the Catholic Church is “urgently in need of reform” with regard to its positions on remarriage after divorce and homosexual relationships
Saturday, May 29, 2010
The Inflation Hawk
The Wall Street Journal’s “Weekend Interview” column recently featured a piece on Kansas City Federal Reserve Bank President and Federal Open Market Committee member Thomas Hoenig (pronounced “HAW-nig”), whom the article describes as the Fed’s “monetary dissident.” Hoenig has earned this label as a result of his lone opposition to the repeated decisions of the FOMC (the committee that sets U.S. monetary policy) to promise that interest rate targets will be held “exceptionally low” for an “extended period of time.” He has been the only member to cast a vote against such language at the committee’s last three meetings.
Hoenig’s dissent is ostensibly motivated by worries that excessively easy monetary policy will lead to the formation of asset bubbles that will precipitate future crises much like the one that recently wracked the U.S. financial system. Although he concedes that the causes of bubbles are somewhat poorly understood, Hoenig also acknowledges that when investors and speculators can borrow at extremely low cost, the chances that asset prices will rise at an artificially fast pace are increased: “when you have an extended period of time with very low interest rates… those are some of the necessary conditions that will enable very rapid credit expansion leading to bubbles, perhaps. At least the likelihood of bubbles is greater under those circumstances.”
Because the FOMC is comprised of professional economists who are relatively insulated from the ephemeral pressures of the political world, there is generally broad agreement within their ranks. Truly fundamental ideological conflict is rare, though the members can certainly be thought of as lying on a spectrum whose poles are the twin objectives that constitute the “dual mandate” of the Federal Reserve: full employment and long-run price stability. For example, UC Berkeley Professor Emeritus Janet Yellen, who is currently President of the Federal Reserve Bank of San Francisco and who sits on the FOMC ex officio, has argued that the Fed ought to be far more concerned with unemployment than inflation at present, and that deflation might even be a more worrying threat given current macroeconomic conditions.
In contrast, Hoenig has been described as an “inflation hawk” because of his countervailing views on how the Fed ought to order its priorities. He maintains that there is little reason to fear that tightening up monetary policy sooner rather than later would inhibit recovery, and that the costs of unintentionally triggering asset bubbles outweigh any potential benefits to be gained by pursuing an expansionary strategy for an “extended period.”
I have a great deal of respect for Hoenig. Whether his persistent criticisms of the consensus view of the FOMC are motivated by real concerns or by a simple contrarian tendency isn’t all that important. What is important is that Hoenig represents a pragmatic sort of intellectualism that is wary of allowing any conclusions to go unchallenged, but that is mature enough to grant that reasonable people can disagree about a particular issue without disagreeing about everything.
Although his inflationary warnings seem to find a more receptive audience on the political right than on the political left, Hoenig avoids extreme positions such as those of Congressman Ron Paul (R-TX), who wants to see the Fed scrutinized more closely by Congress and ultimately done away with entirely. In his interview with the WSJ, Hoenig says that “it would be a tragedy to politicize the Federal Reserve system in any way more than it already is,” and that “the balance of private/public was designed in 1913 specifically to make sure that there was some independence that would allow the Federal Reserve to conduct monetary policy with the long-term in mind.”
In other words, we can have debates about the best way to conduct monetary policy without having fruitless squabbles about whether we should be conducting monetary policy at all. Criticism and dissent are crucial components of any thoughtful discussion (let alone discussions whose outcomes affect the economy of an entire nation), but blanket disagreement for its own sake is petty and counterproductive. If only more of our leaders would realize that.
Hoenig’s dissent is ostensibly motivated by worries that excessively easy monetary policy will lead to the formation of asset bubbles that will precipitate future crises much like the one that recently wracked the U.S. financial system. Although he concedes that the causes of bubbles are somewhat poorly understood, Hoenig also acknowledges that when investors and speculators can borrow at extremely low cost, the chances that asset prices will rise at an artificially fast pace are increased: “when you have an extended period of time with very low interest rates… those are some of the necessary conditions that will enable very rapid credit expansion leading to bubbles, perhaps. At least the likelihood of bubbles is greater under those circumstances.”
Because the FOMC is comprised of professional economists who are relatively insulated from the ephemeral pressures of the political world, there is generally broad agreement within their ranks. Truly fundamental ideological conflict is rare, though the members can certainly be thought of as lying on a spectrum whose poles are the twin objectives that constitute the “dual mandate” of the Federal Reserve: full employment and long-run price stability. For example, UC Berkeley Professor Emeritus Janet Yellen, who is currently President of the Federal Reserve Bank of San Francisco and who sits on the FOMC ex officio, has argued that the Fed ought to be far more concerned with unemployment than inflation at present, and that deflation might even be a more worrying threat given current macroeconomic conditions.
In contrast, Hoenig has been described as an “inflation hawk” because of his countervailing views on how the Fed ought to order its priorities. He maintains that there is little reason to fear that tightening up monetary policy sooner rather than later would inhibit recovery, and that the costs of unintentionally triggering asset bubbles outweigh any potential benefits to be gained by pursuing an expansionary strategy for an “extended period.”
I have a great deal of respect for Hoenig. Whether his persistent criticisms of the consensus view of the FOMC are motivated by real concerns or by a simple contrarian tendency isn’t all that important. What is important is that Hoenig represents a pragmatic sort of intellectualism that is wary of allowing any conclusions to go unchallenged, but that is mature enough to grant that reasonable people can disagree about a particular issue without disagreeing about everything.
Although his inflationary warnings seem to find a more receptive audience on the political right than on the political left, Hoenig avoids extreme positions such as those of Congressman Ron Paul (R-TX), who wants to see the Fed scrutinized more closely by Congress and ultimately done away with entirely. In his interview with the WSJ, Hoenig says that “it would be a tragedy to politicize the Federal Reserve system in any way more than it already is,” and that “the balance of private/public was designed in 1913 specifically to make sure that there was some independence that would allow the Federal Reserve to conduct monetary policy with the long-term in mind.”
In other words, we can have debates about the best way to conduct monetary policy without having fruitless squabbles about whether we should be conducting monetary policy at all. Criticism and dissent are crucial components of any thoughtful discussion (let alone discussions whose outcomes affect the economy of an entire nation), but blanket disagreement for its own sake is petty and counterproductive. If only more of our leaders would realize that.
Friday, May 28, 2010
"The Right Answer Forever"
I was pleased to discover that someone videotaped and posted online a talk that I attended at Haverford in early April by Nobel Prize-winning economist A. Michael Spence. His presentation provided an impressively thorough overview of the factors driving the rapid economic growth currently taking place in China, as well as the motivation behind (and possible consequences of) Chinese currency policy. I was particularly satisfied with Spence’s reply to a question that I posed about the impact of social safety nets on growth; though he remarked that he might have been “overstating” the issue, he used my question as a jumping-off point for a refreshing criticism of our political system’s obsession with making grand ideological debates out of even the most straightforward questions of short-term policy. According to Spence, it ought to be clear that any given piece of policy must necessarily change over time, and that “debating it on… first principles… to get the sort of right answer forever ain’t gonna solve the problem.”
My question and Spence’s reply can be found here (beginning at 25:45 in the section titled "Q & A").
My question and Spence’s reply can be found here (beginning at 25:45 in the section titled "Q & A").
Saturday, May 1, 2010
Obama on Openmindedness
"Still, if you're someone who only reads the editorial page of The New York Times, try glancing at the page of The Wall Street Journal once in awhile. If you're a fan of Glenn Beck or Rush Limbaugh, try reading a few columns on the Huffington Post website. It may make your blood boil; your mind may not often be changed. But the practice of listening to opposing views is essential for effective citizenship."-President Obama, in his commencement remarks at the University of Michigan
Tuesday, April 27, 2010
In Defense of the VAT
Earlier today, President Obama convened the first meeting of an eighteen-member bipartisan commission tasked with devising a plan to bring down the federal government’s record budget deficits. Expectations are understandably low. Few believe that the necessary but politically unpalatable decisions will be made in an election year, and even fewer believe that Congress will actually adopt the recommendations of the commission in the event that a consensus does emerge.
Cumulative federal deficits are projected to exceed $8 trillion in the coming decade, a level that economists believe poses a serious threat to future growth. As the president explained in his remarks at the start of the meeting, the magnitude of the problem is such that all options must be on the table. This means that liberals ought to be willing to consider reductions in the amount spent on popular programs such as Social Security and Medicaid, and conservatives ought to accept the fact that federal revenues must somehow be enhanced. These two sides of the equation – spending cuts and tax increases – are equally vital, but it’s the second that I’d like to briefly examine in greater detail.
Raising taxes on the wealthiest Americans is the least damaging option politically, but there are limits to the amount that the government can actually collect by doing so. In addition, there is truth to the argument that excessive taxation of corporations and high-earning individuals inhibits the sort of investment spending essential to the competitiveness of our economy. This is not to say that social priorities like economic equity cannot factor into the design of a tax code, but that these priorities must not be pursued at the expense of our standard of living.
An alternative to an across-the-board increase in income and payroll taxes is a value-added tax or VAT, a type of consumption tax widely used in the industrialized world. The VAT has a number of appealing attributes: it is relatively easy to collect, it promotes saving over spending, and it is border adjustable.
A VAT is a tax that is collected at every step in the chain of production and that is levied only on the “value added” at a particular step. Ultimately, the cost of the tax is borne almost entirely by the consumer, though it is not collected only at the point of purchase like an ordinary sales tax. By levying the tax on all producers and not just on those that sell to consumers, the government is able to minimize revenue losses. The effect of a single firm attempting to evade the tax is diminished by the fact that there are more firms paying it.
Critics of the current federal tax system, which relies primarily on personal and corporate income taxes and payroll taxes, point out that the status quo encourages immediate consumption over saving and investment. Income that is spent is taxed once; income that is saved is taxed twice, since depositors and investors pay taxes on interest and capital gains. Moving toward a consumption-based tax system would encourage individuals to opt for behavior that is better for the long-term structural soundness of the economy (saving) over behavior that has mostly short-term benefits (spending).
The VAT would also help to correct America’s enormous trade deficit by virtue of the fact that it is border-adjustable. Under current World Trade Organization agreements, nations with taxes such as the VAT allow exports an exemption while still exacting a levy on imports. The fact that the United States does not have taxes that are inherently border-adjustable is a significant damper on the competitiveness of our exports. A policy of this sort amounts to a de facto tariff on products bought from the United States, or a de facto trade subsidy to products that the U.S. buys from elsewhere.
There are two main arguments against the value-added tax. The criticism advanced primarily by liberals is that such a tax is regressive. Low and middle-income individuals spend a greater portion of their income on consumption than do the wealthy, who are more likely to save and invest. Some nations with VATs have attempted to reduce their burden on the poor by exempting certain essential goods and services like food and medical care, but there is a solid case to be made that this only causes inefficiency by incentivizing firms to pretend that their products are something they are not (e.g. prepared food rather than non-prepared food) in an effort to gain a price advantage over their competitors. Even worse, it can set the stage for intense political lobbying of the authorities who decide what gets taxed and what doesn’t. A more elegant solution to the problem of regressivity is to provide rebates to low-income taxpayers or to modify the rest of the tax code so that progressivity is preserved (i.e. by cutting marginal income tax rates or by increasing the personal exemption).
The other notable criticism of the VAT comes from the other end of the political spectrum. Conservatives claim that the very efficiency and relative invisibility with which the tax can be collected is a reason to believe that it will only serve to license a dramatic growth in government spending. This is a valid fear, and one that is substantiated by the past experiences of other nations with VATs and states with high sales taxes such as California and New Jersey. But the alternative is much worse; heavy borrowing cannot continue forever, and the sooner steps are taken to rein in the problem, the less painful they need be. Given our nation’s history of vigorous opposition to any form of new taxation, I find it difficult to accept the notion that politicians could wantonly increase VAT rates without coming up against the same sort of antitax forces fueling the current opposition to the policies of Obama and the Democrats in Congress.
Former Federal Reserve Chairman and Obama Administration economic adviser Paul Volcker recently declared that the VAT is “not as toxic” an idea as it has been made out to be. Politically, it remains to be seen whether this is the case, and it’s doubtful at best that it is. Economically, this is certainly true. Such a tax can be an important part of a recipe for ensuring robust economic growth and sustainable fiscal policies in the years and decades ahead. Let’s hope that Obama’s bipartisan commission and our leaders in Congress have the courage and will to consider it.
Cumulative federal deficits are projected to exceed $8 trillion in the coming decade, a level that economists believe poses a serious threat to future growth. As the president explained in his remarks at the start of the meeting, the magnitude of the problem is such that all options must be on the table. This means that liberals ought to be willing to consider reductions in the amount spent on popular programs such as Social Security and Medicaid, and conservatives ought to accept the fact that federal revenues must somehow be enhanced. These two sides of the equation – spending cuts and tax increases – are equally vital, but it’s the second that I’d like to briefly examine in greater detail.
Raising taxes on the wealthiest Americans is the least damaging option politically, but there are limits to the amount that the government can actually collect by doing so. In addition, there is truth to the argument that excessive taxation of corporations and high-earning individuals inhibits the sort of investment spending essential to the competitiveness of our economy. This is not to say that social priorities like economic equity cannot factor into the design of a tax code, but that these priorities must not be pursued at the expense of our standard of living.
An alternative to an across-the-board increase in income and payroll taxes is a value-added tax or VAT, a type of consumption tax widely used in the industrialized world. The VAT has a number of appealing attributes: it is relatively easy to collect, it promotes saving over spending, and it is border adjustable.
A VAT is a tax that is collected at every step in the chain of production and that is levied only on the “value added” at a particular step. Ultimately, the cost of the tax is borne almost entirely by the consumer, though it is not collected only at the point of purchase like an ordinary sales tax. By levying the tax on all producers and not just on those that sell to consumers, the government is able to minimize revenue losses. The effect of a single firm attempting to evade the tax is diminished by the fact that there are more firms paying it.
Critics of the current federal tax system, which relies primarily on personal and corporate income taxes and payroll taxes, point out that the status quo encourages immediate consumption over saving and investment. Income that is spent is taxed once; income that is saved is taxed twice, since depositors and investors pay taxes on interest and capital gains. Moving toward a consumption-based tax system would encourage individuals to opt for behavior that is better for the long-term structural soundness of the economy (saving) over behavior that has mostly short-term benefits (spending).
The VAT would also help to correct America’s enormous trade deficit by virtue of the fact that it is border-adjustable. Under current World Trade Organization agreements, nations with taxes such as the VAT allow exports an exemption while still exacting a levy on imports. The fact that the United States does not have taxes that are inherently border-adjustable is a significant damper on the competitiveness of our exports. A policy of this sort amounts to a de facto tariff on products bought from the United States, or a de facto trade subsidy to products that the U.S. buys from elsewhere.
There are two main arguments against the value-added tax. The criticism advanced primarily by liberals is that such a tax is regressive. Low and middle-income individuals spend a greater portion of their income on consumption than do the wealthy, who are more likely to save and invest. Some nations with VATs have attempted to reduce their burden on the poor by exempting certain essential goods and services like food and medical care, but there is a solid case to be made that this only causes inefficiency by incentivizing firms to pretend that their products are something they are not (e.g. prepared food rather than non-prepared food) in an effort to gain a price advantage over their competitors. Even worse, it can set the stage for intense political lobbying of the authorities who decide what gets taxed and what doesn’t. A more elegant solution to the problem of regressivity is to provide rebates to low-income taxpayers or to modify the rest of the tax code so that progressivity is preserved (i.e. by cutting marginal income tax rates or by increasing the personal exemption).
The other notable criticism of the VAT comes from the other end of the political spectrum. Conservatives claim that the very efficiency and relative invisibility with which the tax can be collected is a reason to believe that it will only serve to license a dramatic growth in government spending. This is a valid fear, and one that is substantiated by the past experiences of other nations with VATs and states with high sales taxes such as California and New Jersey. But the alternative is much worse; heavy borrowing cannot continue forever, and the sooner steps are taken to rein in the problem, the less painful they need be. Given our nation’s history of vigorous opposition to any form of new taxation, I find it difficult to accept the notion that politicians could wantonly increase VAT rates without coming up against the same sort of antitax forces fueling the current opposition to the policies of Obama and the Democrats in Congress.
Former Federal Reserve Chairman and Obama Administration economic adviser Paul Volcker recently declared that the VAT is “not as toxic” an idea as it has been made out to be. Politically, it remains to be seen whether this is the case, and it’s doubtful at best that it is. Economically, this is certainly true. Such a tax can be an important part of a recipe for ensuring robust economic growth and sustainable fiscal policies in the years and decades ahead. Let’s hope that Obama’s bipartisan commission and our leaders in Congress have the courage and will to consider it.
Saturday, March 27, 2010
The Radical Center
Thomas Friedman of the New York Times has an excellent column out this week in which he argues for a “Tea Party of the radical center,” a grassroots movement that would aim to wrest power from the “oligopoly of our two-party system.” As idealistic as such a vision might sound, anti-partisan rhetoric of this kind is increasingly moving from the realm of journalists’ fantasies to the real world of politics. The Times recently carried as well an op-ed by former Oregon secretary of state Phil Keisling arguing for reform of the primary election system. He explains that such changes as he proposes would empower moderates and independents and would keep politicians from having to “practice the dark arts of the ‘message zigzag,’ securing the base then feinting to the center.”
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