Our more aggressive bidders use a crude approach. They look at the trade gap, assume that every billion dollars of trade deficit equates with a certain number of jobs, and multiply. Fair, in contrast, uses years of data to estimate a detailed model of how the global economy works. Then he reruns the model under the assumption of a 25 percent appreciation in China’s exchange rate. His model contains the same effects that the others rely on—increased demand for U.S. goods as Chinese imports become more expensive. But he sees offsetting effects as well: decreased Chinese output and imports; increased U.S. prices; decreased U.S. wealth and wages; increased U.S. interest rates. He finds the latter effects more than outweigh the former.
Politics and policy from inside Washington
My friend Bruce Bartlett over at the Capital Gains and Games blog asks whether conservatives should have supported Hillary Clinton in the 2008 presidential race:
I wrote a couple of columns in 2007 telling conservatives that they really should consider lending some support to Clinton if they believed, as I did, that Obama was much more liberal than her and that whoever won the Democratic primary would probably win the general election (see here and here). … So would conservatives have been better off following my advice and helping Hillary Clinton to get the Democratic nomination, rather than futilely wasting their efforts on McCain, Mitt Romney and other Republican candidates who could not win and were considered far from ideal from a conservative point of view anyway? … I think the evidence suggests that Hillary Clinton could have won the Democratic nomination with just a little bit more support, and probably would be governing significantly more conservatively than Obama. For one thing, given her disastrous experience with health care reform in 1993-1994, it’s reasonable to assume that she would have stayed away from that issue at all costs.
Me: Bruce derives most of his evidence from the idea that Hillary’s centrism has seriously influenced the direction of Obama’s foreign policy. Now I certainly have no reason to believe Hillary wouldn’t have pushed hard on healthcare reform. She certainly spent a lot of time and resources creating a detailed plan during the campaign and then promoting it.
As for economic policy more generally, you couldn’t produce a more centrist Democratic economic team than the one Obama has assembled: Summers, Romer, Goolsbee, Geithner. No actual Republicans (probably not) but no one that “progressives” have much fondness for either. As for actual policy, Hillary would likely have favored a big stimulus plan and major healthcare reform. Would she have been tougher on the banks? Coming out of the pro-Wall Street Clinton presidency and her time as NY senator, I doubt it.
Henry Blodget says he’s pretty confident taxes are headed higher to deal with the historic rise in federal spending and agrees with Northern Trust’s Paul Kasriel that higher rates won’t be an economy killer. Blodget quotes Kasriel:
The economy performed pretty well in the eight years ended 2000 even though the top marginal tax rate was higher in these eight years than it was in the prior eight years. The economy did not perform better because of the increase in the top marginal tax rate. Nevertheless, this increase was not sufficient to derail economic progress. In the eight years ended 2008, the economy performed relatively poorly despite the lower top marginal tax rate. The economy did not under-perform because of the marginal tax rate cut. Nevertheless, the cut in the tax rate was not sufficient to enhance economic performance. The point of all this is that although tax rates matter, they are not all that matters.
Me: I agree that taxes matter but they are not the only thing that matters. But they do matter a lot. Back when tax rates rose in the 1990′s, the economy was starting from a position of strength, not weakness. There was already a powerful, self-sustaining recovery in place. Let me point out this 2009 study that examined the affect of higher marginal tax rates on the rich:
Taxes trigger a host of behavioral responses designed to minimize the burden on the individual. … all such responses are sources of inefficiency, whether they take the form of reduced labor supply, increased charitable contributions, increased expenditures for tax professionals, or a different form of business organization, and thus they add to the burden of taxes from society’s perspective.
Following the supply-side debates of the early 1980s, much attention has been focused on the revenue-maximizing tax rate. A top tax rate above X is inefficient because decreasing the tax rate would both increase the utility of the affected taxpayers with income above X and increase government revenue, which can in principle be used to benefit other taxpayers. … Using our previous … the revenue-maximizing tax rate would be 55.6%, not much higher than the combined maximum federal, state, Medicare, and typical sales tax rate in the United States of 2008.
And this is before the 2011 tax increases and the increase in taxes related to healthcare reform. We are probably now on the wrong side of the Laffer Curve. Greg Mankiw also makes the case that Americans are not undertaxed compared with the rest of the planet’s advanced economies.
When will the other chaussure drop? Now that America has gone French (and German and British) with universal healthcare, expect Washington to eventually propose a European-style, value-added consumption tax to pay for it — as well as the rest of the historic rise in federal spending. But U.S. voters are in a severe anti-tax mood. It might take another financial crisis to give politicians the will and hubris to ignore them.
Here’s how it might all play out:
1) For Washington insiders, it’s a matter of “when” not “if.” Politicians and economists I chat with from the White House to Capitol Hill to the Federal Reserve think a VAT inevitable. Healthcare reform has only hardened that consensus. Spending cuts to pay for expanded coverage may not happen. Either way, the budget numbers scream for action. Annual federal spending as a share of GDP will likely outpace revenue by at least six percentage points for years to come. Trillion-dollar deficits the norm.
2) Just slashing spending is one option. But that would require a radical reshaping of social-insurance schemes as outlined by Rep. Paul Ryan in his recent white paper, “A Roadmap for America’s Future.” The war over healthcare would seem a minor skirmish by comparison. A battle worth fighting, but a coalition of the willing might be small.
3) Maybe a broad income tax increase? So far Washington has shown an appetite for nicking only the rich. And one study suggests the tax burden on wealthy households is approaching — or has perhaps even exceeded — the revenue-maximizing level. That’s right, America is on the wrong side of the Laffer Curve again. Even assuming the rich wouldn’t flee to tax shelters, top income tax rates would need rise to economy-crushing levels to balance the budget.
4) Anyway, it’s smarter to tax consumption broadly rather than work and investment narrowly. Especially in an economy that needs less of the former and more of the latter. And that is what a VAT does. Few doubt its ability to raise massive amount of revenue with fewer disincentives than the current system. But if the economics are clear, the politics are a puzzle in Tea Party America. VAT proponents assume political intransigence without a financial crisis to spur action, just as market chaos helped get the $700 billion bank rescue passed in 2008.
5) Yet there is a reasonable scenario where America would accept a VAT. In fact, it is the only scenario under which we should accept a VAT.
First, Washington would have to demonstrate it could manage the public purse by reforming entitlements in a Ryan-esque manner. A tall order, but a necessary prerequisite or else voters would fear that entire six-point budget gap would be closed by tax hikes via a VAT. So, in the end, government spending needs to be dramatically cut. (Preferably, we would never need to get past this step.;)
Second, a VAT would have to completely overwrite the current complex and inefficient tax code. If not, voters would fear getting hit by both VAT and income tax hikes. A VAT can’t be an add on.
Third, every sales receipt in America would have to indicate the VAT penalty. But politicians love the hidden aspect of a VAT as way of duping voters. To them opaqueness is a feature, not a bug.
Fourth, the intended tax burden should be kept level at first. A pro-growth VAT — one that does away with corporate and investment taxes — might produce more revenue merely by expanding the economic pie.
Still a tough sell. Better skip the part about the French.
Ed Yardeni makes the comparison:
What a big relief! I’m not referring to the great stock market rally over the past year, but rather to Tuesday’s “Big Bang.” Particle physicists used the Large Hadron Collider near Geneva to simulate the event that might have occurred at the beginning of the universe. A few Doomsayers warned that the experiment could create a black hole that would suck us all into oblivion. Fortunately, they were wrong. However, even if a doomsday scenario is a small risk, shouldn’t all of us on the Planet Earth get to vote on whether the experiments should proceed? A spokesperson for the physicists said, “We are not doing anything that nature has not done before.” That’s not very reassuring. (Where did all the dinosaurs go?)
It all reminds me of ObamaCare. The legislation was passed despite lots of dire warnings that it will blow up both the healthcare system and the federal budget. Nothing terrible has happened so far, though the predictions are that it will be a slow-acting black hole. There has already been a collision between Congressional Democrats and a few CEOs over the adverse impact of the law on corporate earnings and retiree drug benefits. This spat along with the passage of ObamaCare haven’t unnerved stock investors so far. Maybe that’s because they are relieved.
Forget about being forced to buy health insurance. Aren’ t Americans pretty much forced by our complex tax code to buy tax prep software or see an accountant? That is a mandate, too, notes Howard Gleckman of TaxVox:
The government does not specifically require us to hire paid tax preparers or buy commercial software, of course. But it has, in effect, left millions of taxpayers with no real choice. Congress has created a tax code that makes it nearly impossible for many Americans to file returns without paid help. And even those who could … are so intimidated by the whole process that they pay people to help them anyway.
Thus, in 2005, 89 percent of individual taxpayers either used commercial software or hired paid preparers to help them do their civic duty. Just 11 percent, according to my colleague Eric Toder, filed returns on their own.
Yet, we just shrug and pay our $59 for commercial software or pony up between a few hundred and a few thousand dollars to paid preparers. No constitutional challenges. No state attorneys general at the barricades. Many of us, in fact, are likely to spend more money hiring a human being to do our taxes than we’ll pay in penalties for refusing to buy insurance ($95 in 2014 increasing to $695 by 2016). Indeed, I’m willing to bet that more of us will pay somebody to prepare a tax return than will purchase medical coverage, despite the insurance mandate.