Friday, February 20, 2009

Mark Thoma is a Dweeb-Still

Judd Gregg Thinks Tax Cuts Pay for Themselves

Why have we gotten more revenues even though we reduced the tax burden on the American people? The answer is pretty simple. It is called human nature. When you set tax levels at a fair level ... people are willing to go out and invest. ... They are willing to work harder... That creates a stronger economy which puts more people to work, and..., of course, the more jobs you have the more tax revenues you end up getting. ...

Who in the administration thought Gregg would be the best person available "to foster, promote, and develop the foreign and domestic commerce" when he believes ideological nonsense like this?
So I tried to point out simply that first when people throw stones about "ideological nonsense" then you have to honestly look at oneself. I am sure there are things that Dr. Thoma spouts that is ideological nonsense. And secondly that incentives matter or the corollary disincentives matter. As in:
In fact, in the area of capital gains, we have seen a dramatic increase in revenues. ... It is a huge jump in revenues we didn't expect--or at least the Congressional Budget Office didn't expect--but which we received because human nature kicked in and people were willing to sell assets, take that money and reinvest it in things that are productive, create jobs, and as a result we got those revenues. That is why today the Federal Government is actually getting more in revenues than it got under the old tax law where the rates were a lot higher. ...
Thus he is saying that with too high of tax rates people are more likely to avoid paying the taxes or pick investments that are not taxed at such high rates.

Simply acknowledging that instead of his knee jerk reactions as well as deleting my posts, would be a lot less dweebish. I also see another interesting post there:

Sonic Charmer says...

As Alex Tolley points out (but amazingly none of the otherwise alert Straw-Man Police here saw fit to, despite not being shy about demanding quotes for the claim that multiplier fans believe spending pays for itself), Gregg did not actually say "tax cuts pay for themselves" or anything that amounts to that in the quote cited above by Mark Thoma. That may for all I know be what Gregg believes, but if so, the quotes above do not show it. What Gregg actually said above is that when tax rates were cut, revenues increased (citing 'economic expansion' as a cause for this).

Mark Thoma, if you dispute that tax revenues increased during the period Gregg refers to, feel free to advance your data.

More generally, although there are of course people who do say "tax cuts pay for themselves", the real version of the claim about tax cuts is not that they "pay for themselves" per se (whatever that means, exactly - the meaning and timeframe here is ambiguous) but simply that, in effect, taxes collected is a negatively-convex function of tax rates - there is a second-order effect, so when you cut taxes, you don't lose "as much" revenue as a first-order analysis would suggest.

Again, Mark Thoma, if you dispute that, feel free to explain why.

Posted by: Sonic Charmer | Link to comment | February 17, 2009 at 04:42 PM


Tuesday, February 03, 2009

Obama Backs Down, but Should he Have even if Others Scream Protectionism?

Obama Will Review Buy American Provision in Stimulus
Jan. 30 (Bloomberg) -- President Barack Obama’s administration will examine a "buy American" requirement in economic stimulus legislation that has raised concern among U.S. trading partners, White House press secretary Robert Gibbs said.

The administration "will review that particular provision," Gibbs said today at his regular briefing. The president's advisers understand "all of the concerns that have been heard, not only in this room, but in newspapers produced both up north and down south."
Strangely, this incident of having "buy American" seems to have created a hysteria of the thoughts that this is protectionism. And followed down the usual split between those that support free trade no matter all and those that can not see any protectionism measures under any circumstances as bad. The story continues:
President Obama to water down 'Buy American' plan after EU trade war threat
Last night Mr Obama gave a strong signal that he would remove the most provocative passages from the Bill.
"I agree that we can't send a protectionist message," he said in an interview with Fox TV. "I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we're just looking after ourselves and not concerned with world trade."
On the one hand, I am glad that Obama is paying attention to our trading partners. It seems to show that he is willing to consider the needs of other countries. Although besides the other trading partners {other rich countries}, I would doubt if the Bottom Billion will have much sway in Washington now.

On the other hand, I have no problem with any segment of society wishes to emphasize domestic productions including individuals like Sawdust and myself. I and I am sure a lot of Americans consider location as one of many aspects in making purchases. It does not mean that we solely buy US products but that if other things are equal we would choose US products first. And this seems that I would also include in this group any level of government decision making.

On the other hand if it is strictly prohibited by international treaty then that is not something to tamper with.

It seems obvious that consumers should be the deciders in what they purchase. Thus "The Government" when it makes purchases should be free within the confines of a representative democracy should be able to decide who it decides to purchase from and so be it if it is Johnny Lunchbox.

Thus my point was {and maybe not expressed well enough} was that if we have an open bidding process, the government can decide to give preferential bias towards US firms and that would be ok with me. Just as some government jobs give preference to Veterans. When I applied to become a rural mail carrier, Veterans were given either 5 or 10 additional percentage points to their raw scores. Is it fair? Probably not.

So other than taxes {marginally adjusted}, I do not ask others to subsidize Johnny. Just there could be externalities that are not captured by a simple open bidding process and thus the socially optimal solution would not be found.

I do see that you are willing to tax certain transactions to capture some of those externalities {taxes} which might be considered slightly similar to what my contentions are. We might even agree with certain Libertarian Paternalism {Soft paternalism}.
US-EU trade war looms as Barack Obama bill urges 'Buy American'

I remember that Bush also got into trouble with a similar provision, but why should US taxpayers promote other nation's export sectors? US taxpayers are going to pay this back not importers. So as I talked about above, if we want it to stimulate the economy then emphasis on domestic productions would provide more bang for the buck.

This is completely different than the laws enacted during the Great Depression where everything for every segment of the economy was affected.

As far as the Europeans, they understand the leakages of Fiscal Policies and Keynesian multipliers. In their case, the leakages is even greater for each individual country because of no trade restrictions between member states. You may remember when the EU nations were all enacting Fiscal Stimulus and Germany was reluctant to "chip in". I am sure there was some major arm twisting to make sure they enacted a similar fiscal stimulus package. And a couple of articles on their latest stimuli:
FACTBOX-Europe's fiscal stimulus plans to tackle crisis

Fiscal update: Stimulus plans around the world
A stimulus in one state has so many leakages that is nearly impossible to have any effect on the economy of that state. Something one of my first Economics Teachers talked about (her being a woman's studies professor and all).

The difference is that if we feel that we need a fiscal stimulus {and that honestly is still a question to some people} then it should be given the highest "bang for the buck". Much like Krugman and other Economists are saying. I am not sure why, with your knowledge, you can see and identify the basics of Keynesian economics.

I have thought a lot about mobility of labor, and I agree with the basic tenets of the analysis that free mobility of workers is desirable within the confines of a Liberal Democracy to decide who enters. But whatever is decided will need to be under a "gradualist" approach to your utopia. Also just because capital and labor is mobile between states and localities, does not mean that the Federal Government may not have a role in distributing wealth or creating incentives to bring about more socially optimal solutions, and again through soft paternalism.

Anyway, under this one situation, I think the Europeans and the critics are wrong. And the readers should know by now, I do not want any trade restrictions aside from those that a Liberal Democracy decides including punishing "bad countries". The Bottom Billion should have ZERO trade restrictions for imports to the USA.

If the consumer in this situation is the Government? Then the ultimate consumer is the Taxpayer as we seem to agree on. Thus through our representative bodies, "we" should decide how to spend our money.

But are we willing to subsidize the paycheck of steelworkers in China, Japan...???
OK, so let us look at the multiplier effect as we talked about earlier. Let us say we have a project and it requires a bid with a competent US firm bidding 1 million and a comparable foreign firm bidding 900 thousand. Under your analysis we should hire the foreign contractor. Right, V???

So what are the effects on the economy and the Federal Budget?
The economic effects on the Foreign purchase will not give provide any multiplier effect on the economy as the content we will assume is 100% foreign and the transportation revenue I will count as insignificant.

Now what are the effects from a "Buy America-First"?
First let me assume 80% content on the steel and 100% of that will be reflected in higher wages or retained earnings in our economy of the 80%. Thus we have a first round effect on the economy of $800,000 and with a 18% overall revenue from the economy we could see that the Fed could generate tax revenues of $154 thousand. Also if we look at the Keynesian multiplier of 1/(1-MPC) then this $800K would translate into 5 times this amount into the economy at $4 million. This is with the assumption of leakages are savings at around .1 and imports of around .1, we could change these numbers but we still get a significant multiplier effect. Thus the $4million in increased economic activity could translate to $720,000 of increased tax revenues.

Who is subsidizing whom?

Foreign contract: $900k
Domestic: $1 million-$720K

As far as the rules of the WTO, do you have some proof of the exact wording of such clauses. Does this limit the Pentagon from purchasing domestic products? And what about US States that have the same practice including state businesses? Do they violate WTO?

I seriously doubt that they would retaliate since they probably practiced the same thing with their fiscal stimuli and secondly they know the Keynesian multiplier effect as much as anyone so just jumping on the band wagon to prevent anything looking like protectionism. They just like us are not sure about the empty suit...

UNDERSTANDING THE WTO: THE AGREEMENTS Non-tariff barriers: red tape, etc
"Rules of origin" are the criteria used to define where a product was made. They are an essential part of trade rules because a number of policies discriminate between exporting countries: quotas, preferential tariffs, anti-dumping actions, countervailing duty (charged to counter export subsidies), and more. Rules of origin are also used to compile trade statistics, and for "made in ..." labels that are attached to products. This is complicated by globalization and the way a product can be processed in several countries before it is ready for the market.

The Rules of Origin Agreement requires WTO members to ensure that their rules of origin are transparent; that they do not have restricting, distorting or disruptive effects on international trade; that they are administered in a consistent, uniform, impartial and reasonable manner; and that they are based on a positive standard (in other words, they should state what does confer origin rather than what does not).
Still do not see any way that the USA is breaking this rule, anymore than any other country is as noted above.



Environmental Externalities and Some Possible Solutions

For this part of the assignment, I want to look at a variety of issues that may arise with a water supply in a rural region. I will do this by bringing up a variety of sources of pollution and some suggestions that may help solve the environmental externalities. Let me first mention that this hypothetical water supply comes from a river that runs through a variety of landscapes and thus land uses including woodland areas near the tributaries then through a variety of farmlands and rural and suburban built up areas.

The first source to discuss is a sluice mining operation that emits low levels of mercury into the river as part of their discharges. I assume that no other negative externality and those mercury emissions affect nearly all sectors of society and as such analyzing all possible externalities may be too difficult and costly to analyze. In this case using contingent valuation [good link to the theory] may be the most efficient way of finding what levels of mercury emissions are acceptable for the majority of citizens affected. The questionnaire would consist of levels of mercury and what the costs to the society would be. For example if people choose zero levels of emissions then some of the costs would be reduced government revenue from the tax base reduction and some compensation to the owners of the mill as well as the laid off workers. In essence after the people spoke then government would devise a regulatory regime that enforces and monitors levels of mercury emissions below that expected by the citizens. Along with this process, government officials may wish to implement “safe minimum standards” to mitigate against events that are highly uncertain with irreversibility. Accumulation of mercury in an environment may have long and persistent consequences that are not easily identified at first. (SG, 6.6.7) Ultimately we are trying to limit this heavy metal to tolerable levels for everyone with direct control measures (Kula, Section 6.3.7). Good point

The second source to discuss is excessive nitrogen runoff from a few large farming landowners into the river affecting a fish cooperative. Here Ronald Coase’s theories may help us get to an optimal level of nitrogen runoff given the property rights of both parties being well defined as well as the rights of who gets to pollute and to what degree. Choosing situations that had fewer numbers of parties to deal with allows transaction costs [excellent point] to be mitigated and to prevent holdouts as well as free-riders from blocking negotiations. Government still has a role to play by being available as arbiter/mediator as well as being able to provide relevant information about costs and benefits for both sets of parties through HPA possibly. Government must also be willing to let the parties negotiate and discourage rent seeking behaviors. If this fails to reach a compromise then government could always step in and use common law to internalize the environmental externalities and make a judgment based on facts discovered through the negotiation process. (Kula, Sections 6.3.1, 6.3.2)

A third source of environmental externalities is from used motor oil dumped into storm drains. Since the source is widespread and happens at random occurrences most methods of enforcement fines or taxes is of little prevention for events that can damage 250,000 gallons of drinking water or 1 million gallons of fresh water from one quart of used motor oil (Ref. 12). Perhaps this is rather too much detail for the assignment – put in a foot-note? Although the desired response tends to wane over time, a propaganda campaign can inform and instruct individuals as to what the consequences of their actions are and appeal to their community consciousness. This does negate having fines and penalties but those do little good when the chances of getting caught are very low but the damage can be so severe. Depending on how a CV is conducted it could provide opportunities for the interviewees to be informed about the problems. Boadu noted a problem with the field work was that village chiefs announced the purpose of the interviews but did provide opportunities for citizens to evaluate the opportunities. (Boadu, P. 465) (Kula, Section 6.3.8)

The fourth source to affect our water source is acid rain caused by industrial plants emitting SO2 into the atmosphere. I assume that the present levels of SO2 gas does not create problems but could if industry expands or emits more SO2 in the future. A good idea to maintain a capped level of emissions while leaving industry as a whole with opportunities to change and grow is through marketable permits. This scheme allows a great deal of flexibility by both the regulators and those companies regulated. Regulators can also get in and buy or sell permits as needed. Since the market is open then other interests could become involved in the transactions also. Any environmental group could purchase rights also and thus reduce pollution discharges. Polluters also have flexibility to either increase levels of emissions by purchasing from more efficient firms or reduce and sell those permits. (Kula, Section 6.3.9)

The fifth source of pollution spilling into our water source is raw sewage from a variety of types of septic tanks or gravity flow drainage systems. When heavy rains or flooding occurs, this raw sewage (along with all the bacteria) is carried downstream. The easiest way to solve this problem is to take over waste removal especially in areas that may leak into the water system. In effect this is expanding public ownership of existing services and incorporating more area in the water treatment district. (Kula, Section 6.3.10) Relate this more to the economic analysis rather than the description of the source material. See may comment on Pigou and Kaldor-Hicks below.

Sedimentation from logging is the sixth factor affecting our river water source. During the permitting process of public lands, the amount of sentiment can be given a weight based on techniques used, areas covered, time of year, and other factors that can be determined before logging begins. If plans are ignored or standards are not maintained then additional taxes could be reassessed. Sedimentation is bound to occur and will affect all the users of the water supply to various degrees so number of claimants could be quite large but taxing the logging for extent of damages done by each timber contract allows a fund to be built up for claims that may arise because of sedimentation. One of the easiest ways to calculate the costs would be to charge what it would be to clean up and put back to the original levels of sedimentation. Belli provides another technique of valuating the costs associated with the various timber projects with “Shadow Project”. It would calculate the costs of the externalities based on what it would cost to reproduce that good. In this case it would be clean water without sedimentation. (Belli, Page 70) Although these techniques would be on the high end of costs, it would try to internalize every aspect of this pollution onto the timber harvest. This example does not abide by Pareto Optimum solution but we at least get to the Kaldor-Hicks criterion since we have collected the Pigou tax to the socially optimal levels. The question becomes how we can distribute the tax receipts so that all people affected can be compensated to the correct amount? (Kula, Section 6.3.3) This is excellent – you need more on the economic principles involved and less on the minute detail of source sof pollution

The seventh and last contributing factor I wish to discuss is the fact that migratory Canadian Geese (or any bird congregation caused by human interaction) can also cause nitrogen runoff. As fascinating as this may be, is this related to the question i.e. developing country? In the process of development, settled areas can be very attractive to a variety of birds. I included this in the analysis because it did not fall into any of the techniques I know about internalizing environmental externalities as easily. I say this because the cause of the externality is not a direct cause of humans polluting but of the secondary effects of creating an environment conducive to certain species. To be more specific, the creation of a golf course will attract Canadian Geese since the well watered grass is constantly fresh and usually near bodies of water including hazard ponds that most likely will overflow to the water source we are concerned about. Since no person is directly responsible then who can be taxed or forced to behave in a certain manner? Even if the government decides to make it a public ownership will not solve the problem only shift which party is hosting the problem. And no amount of propaganda will change the behavior of the geese. While a variety of techniques can be done to reduce the attractiveness of the golf course habitat (Ref. 8, 9), there is still the question of who will pay for such remediation and whether they are acceptable to the public. The easy answer is to make the golf course owners pay for any remediation but then that is punishing those that did not directly create the problems especially if migratory patterns had changed. Ultimately, maybe government should pay for the remediation but that is political question. Does this issue nevertheless have an economics dimension of Cost-Benefit Analysis?

In conclusion, I used a variety of techniques to either internalize the environmental externalities on a river water source or to at least account for how society can deal with those problems. I started out with direct control of a heavy metal; and then used Coase theories to settle the externalities between parties and if that failed to use a common law solution; then how propaganda can influence individual decision makers to raise the level of concern for environmental issues; then created marketable permits to maintain a constant level of SO2 output that prevents acid rain from causing major problems; then take over of certain social services into new areas by expanding public ownership; then the use of pollution taxes on timber harvests to internalize the sediment externality for specific contracts with the government; and then the last one I concluded that based on fairness that the government may end up paying for whatever remediation is needed to overcome the geese problems. [A clear set of conclusions]

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