The Price of a Dollar

The dollar exchange rate with the euro as of Friday is $1.4156. I believe it was $1.19 when the euro officially began and the euro almost immediately declined with respect to the dollar. Eventually, one euro bought less than 90 cents. In recent years, that trend reversed and not long ago, some thought it would hit $1.50.
In today's New York Times, Christina Romer has a column on the exchange rate. In it, she argues that the exchange rate is just a price, a view that most economists would agree with. In general, I do too. However, there are three caveats in my agreement. The first is straight-forward--manipulation of the exchange rate to affect trade patterns should be avoided. Once one country begins it is difficult for others to not follow, and soon we have a kind of beggar-thy-neighbor policy causing problems. Second, when people are uncertain over the state of monetary policy, the exchange rate provides some evidence. The Fed is trying to have an easy money policy right now, and the exchange rate is evidence that they are succeeding even if unemployment remains high.
Finally, all statements about exchange rates being merely prices fail to reflect fully the fact that the dollar is still the reserve currency in the world. Further, the U.S. receives substantial benefits from that status. If other countries, and especially businesspeople and those in financial markets develop a lack of trust in the dollar, the special status of the dollar could switch to another currency. At this point in time, the euro would appear to be the likely candidate, but the Eurozone has problems of its own. China has indicated in the past that it would like a greater role for the reminibi. However, so long as it manipulates its currency, it is unlikely China's currency will replace the dollar. But, forty or fifty years from now, who knows?

BOOMS AND DEPRESSIONS

In previous posts I have described books on the recent "Great Recession" that I found helpful. I just finished the single best book, although it was written in 1932 and about the Great Depression--Irving Fisher's BOOMS AND DEPRESSIONS. Like several recent books, Fisher focused on debt as a key part of the problem. Some of the book read like it could have been written today--debt in securities, debt in housing, for example. I have been critical of the Fed and QEII, but Fisher makes me reconsider somewhat. He focuses a lot on the effects of falling prices during the early 1930s. Bernanke, as a student of the Great Depression, is aware of these dangers and has focused attention on preventing falling prices.
I wish that some publisher would make this fine book available again to the public.

Who is Rich?

Andrew Ross Sorkin of the New York Times has an article in Sunday's paper on how $250,000 became the dividing line between the rich and everyone else. It is worth a look.

Taxing the RIch at the State Level

Article in the weekend edition of the Wall Street Journal talks about states that rely on taxing the rich for most of their revenues suffered significant declines in revenue as a result of the last recession. Incomes of the wealthy tend to be more volatile than for other people. Much of this is due to the fact that most wealthy people have substantial income from equity markets. A sharp fall in the stock market reduces their incomes a lot. For example, the article reports that earnings of the top 1% of households in California fell by more than twice as much as the rest of the state's population. In New York the top 1% of earners paid 41% of the state's income taxes in 2007, compared to 25% in 1994. A result is that when the economy declines, state tax revenues decline even more. The federal government increasingly is relying on tax receipts from the top earners. The problems associated with volatility are less at the federal level, but increasing. Taxing the rich sounds good to many, but there are costs. Once again, there are not free lunches.

GE Avoids Paying Taxes

A front page article in the New York Times concerns how General Electric managed to pay zero corporate income taxes in 2010 even though its profits from U.S. operations was $5.1 billion. It's total profit was $14.2 billion, with the difference not repatriated to the U.S. One can imagine the hue and cry this may cause among liberals, but I think all of us should be concerned.

Taxes distort decision making; there is virtually no way to prevent that. But the U.S. tax code distorts at so many levels it is hard to know the final effects. From the high rate on repatriated profits, to the high corporate tax rate, to tax credits for some activities--the code encourages firms to spend huge amounts of money on lawyers and tax accountants to understand and take advantage of the code. But, that isn't all. The article shows that GE often takes the initiative in lobbying for tax breaks. They have a lot of lobbyists and utilize them. The article ends with a quote from Gary Sheffer, a G.E. spokesman, "We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders. So we want to be sure our voice is heard."

I do not object to lobbying since it is difficult to see how a representative democracy would operate if people cannot make their views known to their representatives. Of course, corporations are not people, but the shareholders and workers are.

The recent task force that made recommendations on ways to reduce the deficit argued for lowering of rates but reducing loopholes and tax breaks. I enthusiastically endores such a plan. On the other hand, I am somewhat pessimistic or cynical. If Congress enacted a simplified tax code for both individuals and corporations that eliminated tax deductions and credits for every item Congress has thought needed support, we would have a better system. But, I would expect that breaks, loopholes, credits and other distortions would creep back in over time, so that a decade from now it would look a lot like the current code.

Government Debt Receiving Attention.

Two items of interest related to federal government deficits are available today. The first is a letter written by ten former chairs of the president's Council of Economic Advisers. The ten include four who served democratic presidents and six who served republican presidents.

A second is a ranking of countries provided by the Comeback America Initiative. A video of his interview on CNBC is also available.

Alfred Kahn Dies

Alfred Kahn died Dec. 27 of cancer. He was 93. I had several opportunities to hear Kahn give a presentation or to talk with him. Once, when I was at Miami University and the other times at LSU. Kahn was the most complete economist I ever met. He worked in the area of regulatory economics, a subject I taught at both the undergraduate and graduate level while at LSU. He knew the theory, he knew the empirical evidence, and he was a practioner of regulation, both in public utility regulation in New York and heading up the CAB under Pres. Carter. He was partially responsible for deregulation of airlines--an act that made airline travel affordable for families. Because of his experience deregulating airlines, he was asked to advise former Communist nations after the collapse of the Soviet empire.

Kahn taught at Cornell University and his daughter married a graduate student in English who ended up teaching at LSU. Consequently, we were able to have him make a couple of presentations when he would be visiting his grandchildren in Baton Rouge. On one occasion, he spoke to a group of faculty about his advising former Communist beaurocrats about "deregulating" their economies. I asked him if he planned on visiting Russia some time. His response was, "No." He added that he would rather go to Italy for the 25th time than go to Russia for the first time. He said that a proud moment in his life was when an Italian asked him what part of Italy he was from. (No German has ever asked me a similar question.)

Another strength of Kahn as an economist was his willingess to learn and to change his mind. An example is that when deregulating airlines, Kahn thought a gradual approach was best. He later concluded that that had been wrong because a slow process created new vested interests. He concluded that a rapid change was better.

I consider Alfred Kahn to be an excellent example to anyone who aspires to be an economist.