James Pethokoukis

Politics and policy from inside Washington

7 reasons a VAT is a dicey proposition

Mar 29, 2010 15:38 UTC

My guy Pete Davis over at Capital Gains and Games unsheathes the katana and slices up the VAT. Not so easy to implement he says. A brief summary of his reasons (though read the whole thing, of course):

1. Like the U.K. when it adopted its VAT in 1973, the U.S. will struggle for at least two years and probably longer to implement a VAT.

2. Compared to our income tax, the VAT is regressive.

3. Tax reformers lambast the complexity of our income tax with good reason, but somehow assume that the same people who legislated that complexity will legislate a clean VAT.

4. I can’t think of a faster way to kill Rust Belt jobs than to impose a VAT.

5. Housing would be hurt by a VAT even if it is zero rated.

6. Exporters would benefit from a VAT, but that benefit would be partially offset to the extent that the dollar appreciated against the currencies of our trading partners.

7. State government sales tax revenues would be directly impacted by a federal VAT.

Economic guru: US faces its worst two decades in history

Mar 29, 2010 14:04 UTC

Get ready for the Long Recession.

Well, at least a long period of time where it is going to seem like the US economy is kind of sickly. That is the conclusion of productivity guru Robert Gordon in a new paper. He says US living standards now face their slowest two-decade growth rate “since the inauguration of George Washington.” More:

The statistical trend for growth in total economy [labor productivity] ranged from 2.75 percent in early 1962 down to 1.25 percent in late 1979 and recovered to 2.45 percent in 2002. Our results on productivity trends identify a problem in the interpretation of the 2008-09 recession and conclude that at present statistical trends cannot be extended past 2007.

For the longer stretch of history back to 1891, the paper provides numerous corrections to the growth of labor quality and to capital quantity and quality, leading to significant rearrangements of the growth pattern of MFP, generally lowering the unadjusted MFP growth rates during 1928-50 and raising them after 1950. Nevertheless, by far the most rapid MFP growth in U. S. history occurred in 1928-50, a phenomenon that I have previously dubbed the “one big wave.”

The paper approaches the task of forecasting 20 years into the future by extracting relevant precedents from the growth in labor productivity and in MFP over the last seven years, the last 20 years, and the last 116 years. Its conclusion is that over the next 20 years (2007-2027) growth in real potential GDP will be 2.4 percent (the same as in 2000-07), growth in total economy labor productivity will be 1.7 percent, and growth in the more familiar concept of NFPB sector labor productivity will be 2.05 percent. The implied forecast 1.50 percent growth rate of per-capita real GDP falls far short of the historical achievement of 2.17 percent between 1929 and 2007 and represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington.

Me: There is no more basic political and economic issue than a nation’s standard of living. If  Gordon is right, this will dominate US politics as another sign of American decline.


Or Plan B we could just throw the Democrats out of office (which even the “Greatest Generation” wouldn’t do), rip Obama’s poisoned laws out of the ground, and get our economy back to a nice happy 4.5% unemployment rate.

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