The Wall Street Journal runs an editorial every Christmas Eve that first appeared in 1949. The sentiment is good and one that I could agree with for the most part. But it also misuses Scripture in a way totally contrary to what Paul was thinking. The title of the editorial is "In Hoc Anno Domini," and begins with Saul of Tarsus on his journey to Damascus. Tyranny in the form of the Roman Empire dominated the Mediterranean region. But into that world came light in the form of a man from Galilee. Several gospel quotations are provided and the idea that the truth would set us free. But, darkness can always return. (This was written not many years after World War II and while the iron curtain was descending). What if humankind returns to a new Caesar?
The editorial concludes with, "And so Paul, the apostle of the Son of Man, spoke to his brethern the Galatians, the works he would have us remember afterward in each of the years of his Lord:
'Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage.'"
Paul was not writing about political freedom. He was writing about spiritual freedom. While I value political freedom a great deal, I do not confuse it with our freedom in Christ. Paul typically introduced himself as a slave of Jesus Christ. In his view, all human beings are slaves--either to Christ or to sin and death. From this perspective, it mattered little whether one was a literal slave or master; the slave who was free in Christ was blessed while his master, if he was a slave to sin, was not.
As Paul said to the Corinthians, "If for this life only we have hoped in Christ, we are of all people most to be pitied." (I Cor. 15:19, NRSV).
Monday, December 24, 2012
Wednesday, December 12, 2012
Will Munis Lose Their Tax Exemption?
According to an article in today's Wall Street Journal, President Obama and Speaker Boehner are willing to consider deductibility limits on municipal bonds. Municipal bonds are bonds sold by state and local governments. For many years, the interest earned on municipal bonds were exempt from federal income taxes. The idea was to reduce the costs of borrowing for state and local governemnts. Investors are willing to accept lower yields on municipal bonds because the interest is tax-exempt. Investors care about their after-tax return, so an investor in the top tax bracket can recieve a lower interest rate on municipal bonds than on equivalent corporate bonds because of the tax difference. One can argue that munipical bonds should or should not be treated differently. I suspect many people would like to see the interest on school bonds remain relatively low. But the rationale offered by politicians, according to the article, is interesting. Clearly, one goal is to increase federal government revenue. The article quotes a portion from the administration's budget documents arguing that limiting interest and other tax breaks for the higher-income households would, "reduce the benefit that high-income taxpayers receive...and help close teh gap between the value of these [breaks] for high-income Americans and the value for middle-class Americans."
I would have hoped there would have been some discussion about the impact on state and local governments and their ability to raise money for capital projects. In general, I favor removing tax breaks across the board. Favoring some groups over others distorts capital markets. But if decisions are made based on income-redistribution concers only, then I don't see that as an improvement.
I would have hoped there would have been some discussion about the impact on state and local governments and their ability to raise money for capital projects. In general, I favor removing tax breaks across the board. Favoring some groups over others distorts capital markets. But if decisions are made based on income-redistribution concers only, then I don't see that as an improvement.
Fed extends bond buying.
The Fed is extending buying bonds. See WSJ article http://online.wsj.com/article/SB10001424127887323981504578175362999853652.html?mod=WSJ__LEFTTopStorieshere.
Tuesday, December 11, 2012
On the Ethics of a Shepherd
I am currently reading a book by Yoram Hazony entitled, The Philosophy of Hebrew Scritpture. I am finding it interesting concerning the Old Testament, but surprisingly also found some ideas that connect with some of the political debate in the last election. In a chapter, "The Ethics of a Shepherd, Hazony discusses differences between Abraham and his great-grandson, Joseph, and argues that the ethical system of the great eastern empires (partially represented by Joseph)--Egypt and Babylon--contrasted with he ethical system developed in the Hebrew Scriptures (as represented by Abraham and Moses). He then compared the ethic of the empires with the Athenian ethic coming from Plato and Aristotle, finding them similar. Hazony writes, "...[Athenian philosphy] continued to find it difficult to think of the ethical life of man as having reference to anything outside the common life of members of the political community constituted by the state. In this respect, the thought of Plato and Aristotle is still much like that of the great empires of the ancient Near East, accepting it as a given that if we are to make sense of the moral order, we must begin with the individual as part of the state that governs him." (p. 130, emphasis in the original). Havony quotes from Plato and then concludes, "The state, then, is to be held sacred, and more revered than one's parents." (p. 131).
Havony also looks at Aristotle, concluding, "Aristotle does not seem to think that the end of man--the highest purposes for the sake of which the individual acts and lives his life--can even be distinguished from the end of the state." (p. 131). Havony claims that the view was the a child would be mistaken to think his parents provided his life and education because actually the laws and the state protect his parents, so ultimately are responsible for the child's life and education.
This sounds like the debate that occurred over a speech President Obama gave in which he said, "You didn't build that." How much of a person's success should be attributed to things the person does versus the environment provided by the state? There was also the words of John F. Kennedy, "Ask not what your country can do for you, ask what you can do for your country." One way of asking this is to ask whether the government is there to provide an environment for the individual to thrive, or is the indivual the servant of the state? These are questions Milton Friedman often wrote about, arguing from a libertarian point of view. While I suspect the truth lies somewhere in between, I fear the collectivist tendency implicit in Kennedy's quote and the implication many tried to draw from Obama's statement.
Havony also looks at Aristotle, concluding, "Aristotle does not seem to think that the end of man--the highest purposes for the sake of which the individual acts and lives his life--can even be distinguished from the end of the state." (p. 131). Havony claims that the view was the a child would be mistaken to think his parents provided his life and education because actually the laws and the state protect his parents, so ultimately are responsible for the child's life and education.
This sounds like the debate that occurred over a speech President Obama gave in which he said, "You didn't build that." How much of a person's success should be attributed to things the person does versus the environment provided by the state? There was also the words of John F. Kennedy, "Ask not what your country can do for you, ask what you can do for your country." One way of asking this is to ask whether the government is there to provide an environment for the individual to thrive, or is the indivual the servant of the state? These are questions Milton Friedman often wrote about, arguing from a libertarian point of view. While I suspect the truth lies somewhere in between, I fear the collectivist tendency implicit in Kennedy's quote and the implication many tried to draw from Obama's statement.
Monday, December 10, 2012
A Longer-Run Look at the U.S. Debt
An article in the most recent Federal Reserve Bank of St. Louis REVIEW by Daniel Thornton offers a long-run perspective on the U.S. Deficit and Debt Problems. It is very interesting and sheds light on what has caused the increase in debt. Several findings are of interest:
1. For most of our history, federal debt was associated with war, and during the time after a war, the debt/GDP fell for a number of years.
2. The exception is the increase in debt associated with the Great Depression, but the increase in debt was not that large.
3. The increase in annual deficits began in the early 1970s.
4. Tax revenues as a percent of GDP stayed relatively constant but federal expenditures as a percent of GDP increased.
5. The increases in government spending are associated with increases in Social Security and Medicare/Medicaid, and other payments to individuals. That is, to transfer payments.
6. The two major sources of government revenue are the individual income taxd and social security taxes.
7. The individual income tax revenue relative to GDP has not been greatly affected by changes in the highest marginal individual income tax rate.
8. The average individual income tax rate paid by households based on income shows that the highest quintile pays an average income tax rate about four times higher than the lowest quintile.
9. Since 1979, the lowest income-earners have benefited the most from all the tax law changes.
Different people are likely to draw different inferences from these "facts." Those who believe that we have to have substantial redistribution will argue that the rise in expenditures is necessary and to close the deficit, more tax revenues need to be raised from the higher-income households. Those who believe the size of government is too large, will call for reduced expenditures. But any future plans should at least acknowledge that historical record.
1. For most of our history, federal debt was associated with war, and during the time after a war, the debt/GDP fell for a number of years.
2. The exception is the increase in debt associated with the Great Depression, but the increase in debt was not that large.
3. The increase in annual deficits began in the early 1970s.
4. Tax revenues as a percent of GDP stayed relatively constant but federal expenditures as a percent of GDP increased.
5. The increases in government spending are associated with increases in Social Security and Medicare/Medicaid, and other payments to individuals. That is, to transfer payments.
6. The two major sources of government revenue are the individual income taxd and social security taxes.
7. The individual income tax revenue relative to GDP has not been greatly affected by changes in the highest marginal individual income tax rate.
8. The average individual income tax rate paid by households based on income shows that the highest quintile pays an average income tax rate about four times higher than the lowest quintile.
9. Since 1979, the lowest income-earners have benefited the most from all the tax law changes.
Different people are likely to draw different inferences from these "facts." Those who believe that we have to have substantial redistribution will argue that the rise in expenditures is necessary and to close the deficit, more tax revenues need to be raised from the higher-income households. Those who believe the size of government is too large, will call for reduced expenditures. But any future plans should at least acknowledge that historical record.
Friday, December 7, 2012
The Fiscal...Cliff...Slope,,,Curb?
The Fiscal Cliff is all they talk about on some of the business channels now, at least by my infrequent watching of the channels. Fiscal policy involves government expenditures and taxes, and both are will be impacted in early January unless Congress and the president come to an agreement about how to change things. On January 1, the Bush tax cuts will expire so rates will return to those that prevailed in 2000. The lowest rate will increase from 10 to 15 percent, the next from 15 to 25 percent, and the remaining by smaller amounts--mostly by 3 percentage points. Other tax changes would also take place such as increased in capital gains and taxes on dividends, and a return to the criteria for the Alternative Minimum Tax that prevailed in 2000. According to the non-partisan Tax Foundation, the increased taxes collected would be $514 billion.
Government spending will also be cut. The law has federal government expenditures falling by $110 billion, divided evenly between defense spending and discretionary non-defense spending, i.e., exclusing Social Security, Medicare, federal pensions and federal salaries. So, both the tax increases and the cuts in government spending are considered contractionary policies, which most economists would consider unwise in a weak economy.
A simplistic way of looking at the effects would be to take the components of GDP and see the impact. In the third quarter of 2012, we had: C = $11,149.4 billion, I = $2080.4 billion, G = $3090.1 billion, and net exports = -$522.9 billion. This gives a GDP of $15,797.4 billion. THe fall in G of $110 billioin reduces government spending to $2908.1 billion, which would lower GDP by 0.7%. Assuming the tax changes lead to reductions in consumption spending, we would have C=$10,35.8 and end up with a reduction of GDP of 3.9%. If spread over a couple of quarters, we would have a recession.
Some argue that the "cliff" is really a "slope" because the changes will occur slowly over the year. People will see lower take-home pay in each paycheck. So, if the new Congress acts, the effects would be minimal. But since the major players politically are the same as we now have, it is difficult to see how a new Congress will so different from the status quo.
There are also some who argue we should go over the cliff. For example, Howard Dean, the former chair of the Democratic National Committee argues "progressives" should want to go over the cliff because it will generate greater tax revenue to fund programs with. The tax increases are about five times more than the spending cuts.
Two other issues worth considering. First, most estimates of government multipliers from before the recent recession were that the multiplier on tax changes was greater than the multiplier on expenditure changes, and permanent changes have much bigger impacts than temporary changes. If so, then the contractionary effects of the tax increases will be much greater than the effects of the spending cuts. Second, tax changes also affect incentives, which would also be a drag on the economy.
On the other hand, if one is not a Keynesian, should one think the effects in the long run may actually be positive?
Government spending will also be cut. The law has federal government expenditures falling by $110 billion, divided evenly between defense spending and discretionary non-defense spending, i.e., exclusing Social Security, Medicare, federal pensions and federal salaries. So, both the tax increases and the cuts in government spending are considered contractionary policies, which most economists would consider unwise in a weak economy.
A simplistic way of looking at the effects would be to take the components of GDP and see the impact. In the third quarter of 2012, we had: C = $11,149.4 billion, I = $2080.4 billion, G = $3090.1 billion, and net exports = -$522.9 billion. This gives a GDP of $15,797.4 billion. THe fall in G of $110 billioin reduces government spending to $2908.1 billion, which would lower GDP by 0.7%. Assuming the tax changes lead to reductions in consumption spending, we would have C=$10,35.8 and end up with a reduction of GDP of 3.9%. If spread over a couple of quarters, we would have a recession.
Some argue that the "cliff" is really a "slope" because the changes will occur slowly over the year. People will see lower take-home pay in each paycheck. So, if the new Congress acts, the effects would be minimal. But since the major players politically are the same as we now have, it is difficult to see how a new Congress will so different from the status quo.
There are also some who argue we should go over the cliff. For example, Howard Dean, the former chair of the Democratic National Committee argues "progressives" should want to go over the cliff because it will generate greater tax revenue to fund programs with. The tax increases are about five times more than the spending cuts.
Two other issues worth considering. First, most estimates of government multipliers from before the recent recession were that the multiplier on tax changes was greater than the multiplier on expenditure changes, and permanent changes have much bigger impacts than temporary changes. If so, then the contractionary effects of the tax increases will be much greater than the effects of the spending cuts. Second, tax changes also affect incentives, which would also be a drag on the economy.
On the other hand, if one is not a Keynesian, should one think the effects in the long run may actually be positive?
Thursday, November 29, 2012
Are We Becoming Europe?
I met a sociologist once who commented that he had visited at Princeton University while on sabbatical. He said, "I used to hate the rich; now I hate them with cause." I understood what he meant, for the rich, especially those who grew up rich, seem to feel entitled to all sorts of benefits and expect others to behave deferentially to them. It might seem then, that I would be ready to raise taxes on the rich. But, other things are involved than merely trying to punish the rich for being rich. While greed is one of the seven deadly sins, so is envy. (My former colleague, Victor Claar, has written and spoken on envy in recent years.)
If we are to receive the benefits of a stable government, we have to pay taxes. But, as noted in a book years ago entitled, THE LAW AND THE PROFITS, governments do not have a tight budget constraint. If they want to spend more they can either tax or borrow more. What should be the amount of people's income that go to taxes? There is no "correct" answer, but one that gets worked out through our political process.
Recently, Steven Rattner had an op-ed in the New York Times, in which he argues for higher taxes on the rich. He writes, "Don't forget that the taxes on capital gains and dividends are absurdly low." I don't know on what he bases that other than personal opinion, and maybe he is correct. But, he completely ignores that the dividends have already been taxed as corporate profits. Rattner wants all of the extra revenue to come from the wealthy, even thought the wealthy already pay the vast majority of federal income taxes. When forty percent of households pay no federal income tax, what skin do they have in the game?
Another piece in the NY Times is by Eduardo Porter. He argues that we should increase the share of GDP that goes to taxes in order to maintain a better safety net than we now offer. Progressivity isn't the key but broader taxes that collect more revenue as well as more generous welfare programs. He argues that that is what the richer countries in Europe do and we should too.
These two pieces are just a sample of editorials and op-ed pieces in which an argument for larger government is offered. Porter is more forthright in his plan by saying we should be more like Europe. But, the European countries are having a harder time maintaining their programs, and this is not just the case for the basked cases like Greece. Germany has made reforms that have loosened labor markets; France is still resisting such liberalization, but is also seeing downgrades to its debt.
A book I am reading, and will do a review of when finished, is The Redistribution Recession by Casey Mulligan. He shows that the generosity of the benefits we offer the unemployed and others has increased substantially since 2007. A result is that many unemployed would need a high-paying job to be better off than they are receiving govenrment benefits. We may be moving closer to Europe whether intended or not. For a couple of decades unemployment in Europe remained higher than in the U.S. The Great Recession altered that briefly. The question now is whether we will follow Europe's path, which has included persistently higher unemployment and slower economic growth.
If we are to receive the benefits of a stable government, we have to pay taxes. But, as noted in a book years ago entitled, THE LAW AND THE PROFITS, governments do not have a tight budget constraint. If they want to spend more they can either tax or borrow more. What should be the amount of people's income that go to taxes? There is no "correct" answer, but one that gets worked out through our political process.
Recently, Steven Rattner had an op-ed in the New York Times, in which he argues for higher taxes on the rich. He writes, "Don't forget that the taxes on capital gains and dividends are absurdly low." I don't know on what he bases that other than personal opinion, and maybe he is correct. But, he completely ignores that the dividends have already been taxed as corporate profits. Rattner wants all of the extra revenue to come from the wealthy, even thought the wealthy already pay the vast majority of federal income taxes. When forty percent of households pay no federal income tax, what skin do they have in the game?
Another piece in the NY Times is by Eduardo Porter. He argues that we should increase the share of GDP that goes to taxes in order to maintain a better safety net than we now offer. Progressivity isn't the key but broader taxes that collect more revenue as well as more generous welfare programs. He argues that that is what the richer countries in Europe do and we should too.
These two pieces are just a sample of editorials and op-ed pieces in which an argument for larger government is offered. Porter is more forthright in his plan by saying we should be more like Europe. But, the European countries are having a harder time maintaining their programs, and this is not just the case for the basked cases like Greece. Germany has made reforms that have loosened labor markets; France is still resisting such liberalization, but is also seeing downgrades to its debt.
A book I am reading, and will do a review of when finished, is The Redistribution Recession by Casey Mulligan. He shows that the generosity of the benefits we offer the unemployed and others has increased substantially since 2007. A result is that many unemployed would need a high-paying job to be better off than they are receiving govenrment benefits. We may be moving closer to Europe whether intended or not. For a couple of decades unemployment in Europe remained higher than in the U.S. The Great Recession altered that briefly. The question now is whether we will follow Europe's path, which has included persistently higher unemployment and slower economic growth.
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