Tuesday, July 13, 2010
Pennies and Nickels and Arnold Kling's monetary idea
Arnold Kling is a libertarian economist who seems to always be grasping at some new idea that I’m sure he hopes will be the Next Great Economic Theory (to unseat Keynes). More often than not, though, he seems to reinvent the wheel arriving back at Keynes. This sometimes provides for some good insights. In this quest he posts this hypothetical about monetary stimulus:
I’m not sure I’m following him here. Assuming the # of dimes and # of pennies are the same then an even swap leaves money supply unchanged (lucky penny owners now have a nickel, unlucky dime holders now have a nickel). If nickels are then reduced by half the economy has less money than before and one would expect deflation. If you don’t believe me ask yourself how the supply of nickels would be cut in half? Would every other nickel holders suddenly see their nickels disappear into a puff of smoke? If so aggregate demand falls, prices fall, nominal GDP falls.
Suppose Kling meant, though, that the Fed ‘up swaps’ every coin. Pennies are worth 5 cents now, nickels twenty five, dimes fifty and so on. In that case I’d agree that nominal GDP wouldn’t really change except for the change in dominations. But why?
Well return to the quantity of money theory and think deeply about it.
MV = PT
Or Money times Velocity equals the Price times the Number of things. PT can be thought of as transactions as can MV. A quarter gets used once every 4 months, that’s four transactions a year. In general more transactions means more GDP since transactions are voluntary and presumably both sides would not do them if they didn’t both see a gain.
Changing coins around doesn’t change the quantity of money, only the quality. And by “quality” I don’t mean “good versus bad” but “quality” in the sense of what properties does the money have (metal or paper, round or rectangle, what color is it, is it called ‘dollars’ or ‘cents’ or ‘lire’ or ‘pounds’ etc). At the end of the day more transactions cannot happen because more money isn’t in the economy to facilitate them.
More money means more transactions or “PT” in the equation. The same effect can be generated, though, by using the same amount of money faster....instead of that quarter being used once every four months its used once every two months. In simply swapping coins, though, the Fed is not actually increasing the number of coins (aka quantity of money) in the economy. Without more money more transactions cannot happen (unless velocity changes). The Fed doesn’t do this though, when it moves it creates new money in the economy without pulling out any old money. The penny holders are unmolested as are the dime holders but nickels are added to the economy. Now those selling goods have new nickel holders as well as old penny and dime holders as potential customers. More transactions have to happen or if the economy is already at full capacity and cannot do anymore transactions the price in each transaction has to increase. Nominal GDP has gone up.
Indeed, but this is hardly perplexing. This is Keynes’s old liquidity trap. The economy is gripped by uncertainty so it would rather hoard money than spend it. The Fed prints the bills but the people who get them won’t spend them. Trying to push up nominal GDP becomes like ‘pushing on a string’ to use another well known Keynes saying. To get even a few dollars more spent the Fed has to print tens, even hundreds of dollars.
Some with a more monetary bent like Scott Summer seek to solve the problem by having the Fed print money and give it to those more likely to spend. Instead of buying short term Treasury bills (from people and institutions that are mostly into locking their money into super-safe investments) buy from other types. So they argue the Fed should buy things like mortgages, credit card debts or other assets. The sellers are believed to be more willing to turn around and use the funds they got towards making more loans which means more spending from those who borrow.
Keynesians like Paul Krugman or Brad De Long see the solution in fiscal stimulus. Let the gov’t buy things which by definition requires transactions. Push the monetarists hard enough and they start to look like Keynesians except they would have the Fed making the purchases rather than the Federal Government through the democratic process.
There is an advantage to the fiscal side, though. The advocates of pushing all the stimulus to the Fed have to consider what happens if the economy picks up and inflation becomes an issue. The Fed has to turn around and sell its assets to collect some of that cash. But if the Fed didn’t buy wisely it may discover the market doesn’t want to give it as much cash for the assets as the Fed brought them for. If the stimulus is fiscal the money supply hasn’t been drastically increased and the Fed remains a barrier against excessive gov’t spending.
For example, suppose that the Fed swaps dimes and pennies for nickels, cutting
the supply of nickels in half. I contend that nominal GDP, measured in dollars,
will stay unchanged. Scott Sumner is prepared to argue differently, but I find
that odd on all sorts of counts. If you think of currency as the key nominal
aggregate, exchanging dimes and pennies for nickels does not change the total
amount of currency outstanding, so why should it change nominal GDP, even if you
believe the quantity theory of money?
I’m not sure I’m following him here. Assuming the # of dimes and # of pennies are the same then an even swap leaves money supply unchanged (lucky penny owners now have a nickel, unlucky dime holders now have a nickel). If nickels are then reduced by half the economy has less money than before and one would expect deflation. If you don’t believe me ask yourself how the supply of nickels would be cut in half? Would every other nickel holders suddenly see their nickels disappear into a puff of smoke? If so aggregate demand falls, prices fall, nominal GDP falls.
Suppose Kling meant, though, that the Fed ‘up swaps’ every coin. Pennies are worth 5 cents now, nickels twenty five, dimes fifty and so on. In that case I’d agree that nominal GDP wouldn’t really change except for the change in dominations. But why?
Well return to the quantity of money theory and think deeply about it.
MV = PT
Or Money times Velocity equals the Price times the Number of things. PT can be thought of as transactions as can MV. A quarter gets used once every 4 months, that’s four transactions a year. In general more transactions means more GDP since transactions are voluntary and presumably both sides would not do them if they didn’t both see a gain.
Changing coins around doesn’t change the quantity of money, only the quality. And by “quality” I don’t mean “good versus bad” but “quality” in the sense of what properties does the money have (metal or paper, round or rectangle, what color is it, is it called ‘dollars’ or ‘cents’ or ‘lire’ or ‘pounds’ etc). At the end of the day more transactions cannot happen because more money isn’t in the economy to facilitate them.
More money means more transactions or “PT” in the equation. The same effect can be generated, though, by using the same amount of money faster....instead of that quarter being used once every four months its used once every two months. In simply swapping coins, though, the Fed is not actually increasing the number of coins (aka quantity of money) in the economy. Without more money more transactions cannot happen (unless velocity changes). The Fed doesn’t do this though, when it moves it creates new money in the economy without pulling out any old money. The penny holders are unmolested as are the dime holders but nickels are added to the economy. Now those selling goods have new nickel holders as well as old penny and dime holders as potential customers. More transactions have to happen or if the economy is already at full capacity and cannot do anymore transactions the price in each transaction has to increase. Nominal GDP has gone up.
If you choose the monetary base, you will have a big problem with the fall 2008 episode, when the Fed pretty much doubled the monetary base and nominal GDP did not even rise, much less double. If you choose a broader definition of money, then you are choosing an aggregate that the Fed does not exactly control.
Indeed, but this is hardly perplexing. This is Keynes’s old liquidity trap. The economy is gripped by uncertainty so it would rather hoard money than spend it. The Fed prints the bills but the people who get them won’t spend them. Trying to push up nominal GDP becomes like ‘pushing on a string’ to use another well known Keynes saying. To get even a few dollars more spent the Fed has to print tens, even hundreds of dollars.
Some with a more monetary bent like Scott Summer seek to solve the problem by having the Fed print money and give it to those more likely to spend. Instead of buying short term Treasury bills (from people and institutions that are mostly into locking their money into super-safe investments) buy from other types. So they argue the Fed should buy things like mortgages, credit card debts or other assets. The sellers are believed to be more willing to turn around and use the funds they got towards making more loans which means more spending from those who borrow.
Keynesians like Paul Krugman or Brad De Long see the solution in fiscal stimulus. Let the gov’t buy things which by definition requires transactions. Push the monetarists hard enough and they start to look like Keynesians except they would have the Fed making the purchases rather than the Federal Government through the democratic process.
There is an advantage to the fiscal side, though. The advocates of pushing all the stimulus to the Fed have to consider what happens if the economy picks up and inflation becomes an issue. The Fed has to turn around and sell its assets to collect some of that cash. But if the Fed didn’t buy wisely it may discover the market doesn’t want to give it as much cash for the assets as the Fed brought them for. If the stimulus is fiscal the money supply hasn’t been drastically increased and the Fed remains a barrier against excessive gov’t spending.
Saturday, January 30, 2010
Loving the Unloved Annuity
NYT has an article on annuities. Bush's Social Security reform failed because it failed to take into account the annuity nature of Social Security. Unlike a 'lump sum' which you will hopefully accumulate, the annuity lasts your whole life.
This is both a good and bad thing. If you're 65 with $100,000 in your 401K you can live it up for a year or two or three. Great if you die at 67 or 68...which some people do of course. But if you live to 92 you're in trouble. Not counting interest, your nest egg will give you maybe $4K per year until you die. An annuity, though, lasts your whole life. But if you give $100,000 at 65 to get a monthly payment of $600 it's not a great deal if you die at 67.
Coupled with this is the ever growing pension problem America has. On the state level and with many companies workers earn pensions for their years of service. In order to guarantee workers a lifetime payment when they retire, states and companies contribute to their own unique pension plans. Pension plans are chronically underfunded, though, opening the door to massive gov't bailouts in the future.
A solution might be to group together insurance companies and offer a standardized annuity. It will be sold in small increments, maybe $100. For $100 you will purchase, say, $0.50 a month starting at age 65 (of course this will vary with age, if you pay the $100 at age 20 it might be $1.25 a month, at age 64 $0.005 a month). The plan will be administered by insurance companies by competitive bid and fully funded at all times. Instead of trusting 50 state governments, numerous local gov'ts and multiple companies to run thousands of individual pension plans, pension benefits will be purchased directly in real time from this independent agency. Not only can employers purchase the units but so could individual workers either for themselves or as gifts. In effect you have a beefed up US savings bond.
The advantages I see are:
1. You're not tied to the economic fortunes of your employer, state or company. A company or state facing fiscal difficulties is likely to try shorting their pension plan payments. Here your pension is purchased as you go so even if your company is bankrupt your pension is not.
2. You build the annuity portion of your retirement in small increments. You don't have the psychological burden of giving up your $100,000 401K balance at 65 to buy an annuity. You can split your 401K between annuities and 'lump sum balances' as you work thereby making a balanced retirement.
3. The moral hazzard issue with pension plans is modified. Right now the incentive in place is for states and companies to underfund their pension plans and make up for it with riskier investments. If they pay off great for everyone but if they fail its the workers who get screwed as well as the taxpayers. Here the charge per unit of annuity is directly tied to what is needed to payoff the promised benefit. If a company lacks funds it will simply not be able to purchase the annuities.
This is both a good and bad thing. If you're 65 with $100,000 in your 401K you can live it up for a year or two or three. Great if you die at 67 or 68...which some people do of course. But if you live to 92 you're in trouble. Not counting interest, your nest egg will give you maybe $4K per year until you die. An annuity, though, lasts your whole life. But if you give $100,000 at 65 to get a monthly payment of $600 it's not a great deal if you die at 67.
Coupled with this is the ever growing pension problem America has. On the state level and with many companies workers earn pensions for their years of service. In order to guarantee workers a lifetime payment when they retire, states and companies contribute to their own unique pension plans. Pension plans are chronically underfunded, though, opening the door to massive gov't bailouts in the future.
A solution might be to group together insurance companies and offer a standardized annuity. It will be sold in small increments, maybe $100. For $100 you will purchase, say, $0.50 a month starting at age 65 (of course this will vary with age, if you pay the $100 at age 20 it might be $1.25 a month, at age 64 $0.005 a month). The plan will be administered by insurance companies by competitive bid and fully funded at all times. Instead of trusting 50 state governments, numerous local gov'ts and multiple companies to run thousands of individual pension plans, pension benefits will be purchased directly in real time from this independent agency. Not only can employers purchase the units but so could individual workers either for themselves or as gifts. In effect you have a beefed up US savings bond.
The advantages I see are:
1. You're not tied to the economic fortunes of your employer, state or company. A company or state facing fiscal difficulties is likely to try shorting their pension plan payments. Here your pension is purchased as you go so even if your company is bankrupt your pension is not.
2. You build the annuity portion of your retirement in small increments. You don't have the psychological burden of giving up your $100,000 401K balance at 65 to buy an annuity. You can split your 401K between annuities and 'lump sum balances' as you work thereby making a balanced retirement.
3. The moral hazzard issue with pension plans is modified. Right now the incentive in place is for states and companies to underfund their pension plans and make up for it with riskier investments. If they pay off great for everyone but if they fail its the workers who get screwed as well as the taxpayers. Here the charge per unit of annuity is directly tied to what is needed to payoff the promised benefit. If a company lacks funds it will simply not be able to purchase the annuities.
Sunday, January 24, 2010
Medical Errors and Malpractice Reform
Hello all, I know the best laid planes of mice and men....everytime I think about creating more of my own posts I end up getting caught commenting on other people's posts on other blogs. Well let's try some posts on my actual blog.
New York Times today has a good article on accidental radiation overdoses. The machine at fault is a fascinating contraption. Basically it works like hand puppets on a wall. Metal 'leaves' block the radiation. Software adjusts the control the shape of the radioactive beam so that the only radiation that hits the body is what is needed to hit the tumor. (See this excellent animation/graphic).
The problem in the worst cases seems to be the machine opened all the 'leaves' giving fatal doses of radiation to the patients. In less extreme cases, the beams were the wrong shape or even targeting the wrong areas resulting in needless exposure to patients (thereby increasing the risks of additional cancers later in life) and/or not treating the actual cancer they have as effectively as possible.
This raises two questions for me:
1. Advocates of malpractice reform in place of real health care reform almost always overstate its usefulness. Nonetheless, they ignore malpractices real purpose which is to punish and deter medical errors. There is a huge amount of medical errors (see this book review for a take on how many errors can be cut by using simple and cheap checklists) that happen. What mechanism should be used to confront them? Malpractice is probably the most market orientated mechanism to confront medical error.
2. A more obvious question, why does this machine have a setting that even allows all its 'leaves' to open thereby giving the patient a fatal dose of radiation? I can't delete a file on my computer without a bunch of 'Do you really want to do this' pop-ups. Why wouldn't this machine be designed with a fail safe prohibiting massive, uncontrolled radiation doses?
New York Times today has a good article on accidental radiation overdoses. The machine at fault is a fascinating contraption. Basically it works like hand puppets on a wall. Metal 'leaves' block the radiation. Software adjusts the control the shape of the radioactive beam so that the only radiation that hits the body is what is needed to hit the tumor. (See this excellent animation/graphic).
The problem in the worst cases seems to be the machine opened all the 'leaves' giving fatal doses of radiation to the patients. In less extreme cases, the beams were the wrong shape or even targeting the wrong areas resulting in needless exposure to patients (thereby increasing the risks of additional cancers later in life) and/or not treating the actual cancer they have as effectively as possible.
This raises two questions for me:
1. Advocates of malpractice reform in place of real health care reform almost always overstate its usefulness. Nonetheless, they ignore malpractices real purpose which is to punish and deter medical errors. There is a huge amount of medical errors (see this book review for a take on how many errors can be cut by using simple and cheap checklists) that happen. What mechanism should be used to confront them? Malpractice is probably the most market orientated mechanism to confront medical error.
2. A more obvious question, why does this machine have a setting that even allows all its 'leaves' to open thereby giving the patient a fatal dose of radiation? I can't delete a file on my computer without a bunch of 'Do you really want to do this' pop-ups. Why wouldn't this machine be designed with a fail safe prohibiting massive, uncontrolled radiation doses?
Friday, November 14, 2008
Auto Bailout Alternative
I've been leaning towards supporting an auto bailout but with a lot of reluctance. We've lived for decades with major airlines in bankruptcy and the economy can function normally. The bailout drug is very seductive once you start taking hits off of it. Detroit also needs a falling out. Bailout or not will not return the Big Three to their old glory nor will it return the old auto towns to what they were.
On the other hand these are not normal times. Credit is frozen and while the economy is on the edge of collapsing. I'm not sure the people who would normally pick up the pieces are able to at this moment. Additionally, since we are guaranteeing a lot of debt indirectly by asorbing AIG's 'insurance' on various corporate bonds, maybe this might be best way to avoid paying a lot more on the other end of the equation.
On the other, other hand I don't trust the government here. They don't have the incentive to force serious change on the Big Three, especially when that change is going to need to include serious union concessions, plant closings and a lot of other things the political system doesn't do very well.
Perhaps the best idea I've heard then is a concentrated effort to pick up the pieces. Namely the people and communities harmed by a collapse of the automakers. Target unemployed workers with additional unemployment insurance, grants for education and business starting, relocation grants for them to move to growing communities and assist towns devasted by plant closings. In the long run this is probably a more efficient bailout because even if the corporations survive, they are probably going to lay off thousands of workers anyway.
On the other hand these are not normal times. Credit is frozen and while the economy is on the edge of collapsing. I'm not sure the people who would normally pick up the pieces are able to at this moment. Additionally, since we are guaranteeing a lot of debt indirectly by asorbing AIG's 'insurance' on various corporate bonds, maybe this might be best way to avoid paying a lot more on the other end of the equation.
On the other, other hand I don't trust the government here. They don't have the incentive to force serious change on the Big Three, especially when that change is going to need to include serious union concessions, plant closings and a lot of other things the political system doesn't do very well.
Perhaps the best idea I've heard then is a concentrated effort to pick up the pieces. Namely the people and communities harmed by a collapse of the automakers. Target unemployed workers with additional unemployment insurance, grants for education and business starting, relocation grants for them to move to growing communities and assist towns devasted by plant closings. In the long run this is probably a more efficient bailout because even if the corporations survive, they are probably going to lay off thousands of workers anyway.
Monday, November 03, 2008
So Why is the Media Biased for McCain!
Yes you heard me. Perhaps you’ve heard about the Project for Excellence in Journalism's report on positive versus negative stories. McCain has 57% negative versus 14% positive. Obama enjoys 36% positive, 29% negative and 35% neutral.
Well right now (about 9 PM EST 11/3/8) Intrade contracts for a McCain win are trading at $10.10 and an Obama win are at $91.20. I’ll go on the record now that Obama’s going to win because that’s where the money is. So why should the media be carrying positive stories on McCain?
This is probably the most intensely covered campaign ever. After nearly two years of nonstop campaigning, record numbers of convention and debate viewers and the maturation of blogs (the news cycle is now driven by blogs with the mainstream media summarizing what you missed by not watching your Google Reader) we have finally hit an end point. Let’s ask why people bother to consume media coverage of the campaigns.
One answer is to learn about the issues and where the candidates stand on them. Yes I hear the laughing too but we got to give this due diligence. If you watch media coverage you’ve probably noticed that very little is about learning about where the candidates stand. On most issues, you don’t really need to know where candidates stand…quick name the pro-choice candidate here, the pro-life one? Don’t know? Have you been in a coma since 1980?
The real answer is that we consume media coverage because we want to know whose going to win. We consume CNN and FOX the way odds makers consume the Betting News. Few of us actually bet on the election (although I wish I had some spare cash to buy Obama contracts from Intrade when they were selling cheap a few months ago) but most of us act as if we are. If, though, that is what we are demanding from the media then what has the media been giving us?
The media’s been bending over backwards to give McCain the benefit of the doubt. Why does every newscast feature paths for McCain to win? To be fair? How many times have you heard the major newscasts present a way for Libertarian candidate Bob Barr to win? The anecdote that sums this up perfectly, in my opinion, was the final debate where CNN’s analysts all declared McCain either the winner or ‘much improved’ only to immediately backtrack when the first polls found that most people thought he lost the debate (again).
So if the media is liberal and leans towards Obama, (Fox News excepted of course) what’s up with only 57% negative stories for McCain while Obama’s stories are more or less split evenly? McCain should be getting 90% negative stories. He is losing the election big time. If you’re using the media to bet on the election they are misleading you with this pathetic ‘fairness’. The media’s primary bias, though, is for money and a close race keeps more eyes on the TV than one that’s already done. So the media will do the best it can to pretend there’s still a cliffhanger here but there isn’t.
That’s it for tonight. We will see tomorrow if I’m made a fool but an insane upset. Go vote everyone!
Well right now (about 9 PM EST 11/3/8) Intrade contracts for a McCain win are trading at $10.10 and an Obama win are at $91.20. I’ll go on the record now that Obama’s going to win because that’s where the money is. So why should the media be carrying positive stories on McCain?
This is probably the most intensely covered campaign ever. After nearly two years of nonstop campaigning, record numbers of convention and debate viewers and the maturation of blogs (the news cycle is now driven by blogs with the mainstream media summarizing what you missed by not watching your Google Reader) we have finally hit an end point. Let’s ask why people bother to consume media coverage of the campaigns.
One answer is to learn about the issues and where the candidates stand on them. Yes I hear the laughing too but we got to give this due diligence. If you watch media coverage you’ve probably noticed that very little is about learning about where the candidates stand. On most issues, you don’t really need to know where candidates stand…quick name the pro-choice candidate here, the pro-life one? Don’t know? Have you been in a coma since 1980?
The real answer is that we consume media coverage because we want to know whose going to win. We consume CNN and FOX the way odds makers consume the Betting News. Few of us actually bet on the election (although I wish I had some spare cash to buy Obama contracts from Intrade when they were selling cheap a few months ago) but most of us act as if we are. If, though, that is what we are demanding from the media then what has the media been giving us?
The media’s been bending over backwards to give McCain the benefit of the doubt. Why does every newscast feature paths for McCain to win? To be fair? How many times have you heard the major newscasts present a way for Libertarian candidate Bob Barr to win? The anecdote that sums this up perfectly, in my opinion, was the final debate where CNN’s analysts all declared McCain either the winner or ‘much improved’ only to immediately backtrack when the first polls found that most people thought he lost the debate (again).
So if the media is liberal and leans towards Obama, (Fox News excepted of course) what’s up with only 57% negative stories for McCain while Obama’s stories are more or less split evenly? McCain should be getting 90% negative stories. He is losing the election big time. If you’re using the media to bet on the election they are misleading you with this pathetic ‘fairness’. The media’s primary bias, though, is for money and a close race keeps more eyes on the TV than one that’s already done. So the media will do the best it can to pretend there’s still a cliffhanger here but there isn’t.
That’s it for tonight. We will see tomorrow if I’m made a fool but an insane upset. Go vote everyone!
Wednesday, October 29, 2008
Greg Mankiw's Blog: My Personal Work Incentives
Greg Mankiw's Blog: My Personal Work Incentives
Another thought on incentives. Imagine a hypothetical world where everyone's tax rates were 0% except for one unlucky person who gets hit by the 100% rate. Using Mankiw's analysis, this world would be a much more horrible place than it is now or would be under either the Obama or McCain plans.
But it would be just the opposite. 99.9999% of the population would enjoy the massive $28 incentive for earning an extra $1. The one unlucky guy could even be well compensated if just a portion of the population were willing to pitch him a buck for drawing the short stick in the tax lottery.
Which leads us to a flaw in his analysis here. He focuses only on the worse case scenario rather than examining the entire population. For example, for most people the estate tax is 0% because their estates will not be more than the exemption. When confronting the issue of whether to push a bit harder to make that extra $1 they don't care about Warren Buffet's incentives, they care about their own.
To really measure the incentive impact of the different tax plans one has to divide the population into groups and calculate an incentive rate for each one. Computationally challenging but not impossible and it provides a better picture than simply looking at the worse case.
UPDATE: Greg Mankiw has covered this before here. However the calculation does not seem to take population into account. In the above hypothetical the average tax rate is 50% (100% + 0% = 100% /2 = 50%) but that's a very different economy than one where half the population is paying 0% and the other half is paying 100%.
Another thought on incentives. Imagine a hypothetical world where everyone's tax rates were 0% except for one unlucky person who gets hit by the 100% rate. Using Mankiw's analysis, this world would be a much more horrible place than it is now or would be under either the Obama or McCain plans.
But it would be just the opposite. 99.9999% of the population would enjoy the massive $28 incentive for earning an extra $1. The one unlucky guy could even be well compensated if just a portion of the population were willing to pitch him a buck for drawing the short stick in the tax lottery.
Which leads us to a flaw in his analysis here. He focuses only on the worse case scenario rather than examining the entire population. For example, for most people the estate tax is 0% because their estates will not be more than the exemption. When confronting the issue of whether to push a bit harder to make that extra $1 they don't care about Warren Buffet's incentives, they care about their own.
To really measure the incentive impact of the different tax plans one has to divide the population into groups and calculate an incentive rate for each one. Computationally challenging but not impossible and it provides a better picture than simply looking at the worse case.
UPDATE: Greg Mankiw has covered this before here. However the calculation does not seem to take population into account. In the above hypothetical the average tax rate is 50% (100% + 0% = 100% /2 = 50%) but that's a very different economy than one where half the population is paying 0% and the other half is paying 100%.
Tuesday, October 28, 2008
Ceteris Paribus Is Now Always Your Friend
Over on Pseudo-Polymath I was having a discussion over whether or not Obama is a socialist (or, ‘more socialist’ than McCain). I made the point that McCain’s health care plan is estimated to cost $2T while Obama’s is $1T.
McCain’s health plan is $0 you know. What sort of plans of his is he going to be able to push though a Democratic locked Congress?
Here we meet the old friend of economists, ceteris paribus or “all else being equal”. There are real relationships between variables in our world. If you raise the price of something, people will buy less of it and vice versa. But lots of stuff is always happening. You may raise the price of something and end up with more sales because people have suddenly decided it is popular, or because something else is sold out and this is the next best thing or any one of an uncountable number of possible scenarios.
So we usually say, without actually saying it, that if everything else stays the same then something will happen if a certain other thing happens. Raise the price and you’ll get fewer sales. If the price of milk skyrockets, coffee demand will probably fall (most of us don’t drink it black) and you can probably come up with a million other examples.
In this debate the response is a bit unfair. Of course neither candidate’s plan will ever be enacted as currently written. If McCain, through some odd chance, wins the election he will face a very angry and very Democratic Congress and even if he is serious about pushing his healthcare plan, it almost certainly would end up dead on arrival or drastically changed in its final form. But if we are going to ask who is ‘more socialist’ we should try to hold everything else constant. What is Obama’s plan, what is McCain’s plan and let’s try to measure ‘how socialist’ they are. If we are going to try to predict what type of policies will actually be passed 1, 2, or 3 years from now we are going to have to play a lot of speculative games. McCain, for example, might agree to a ‘very socialist’ health plan in exchange for Congress not yanking the funding for an extended Iraq occupation. A President Obama might have to ditch healthcare if the financial collapse makes gov’t borrowing impossible. (Don’t get me wrong, I think this whole socialism debate is nonsense. In less than a month we just decided to spend almost a trillion dollars to buy up banks, bad debt and bail out huge companies….the ‘socialism’ argument at this point is a bit like the arguments over Star Trek versus Star Wars...except the people who get impassioned about that are typically more reality grounded).
But Ceteris Paribus isn’t always our friend. Over on Greg Mankiw’s blog, he has a fascinating post comparing work incentives under Obama versus McCain’s tax plans.
Basically he looks at a no-tax world. Assume you work today to feed yourself and your family and provide a standard of living that you find acceptable. You would take on extra work (an hour of overtime, a side job, etc.) primarily to benefit your kids by being able to leave it to them. If you earn $1 extra today, he estimates that it would benefit his kids by $28. Why? No taxes plus compound interest.
Under McCain’s plan the benefit is $4.81 and Obama’s it is $1.85. This is, of course, due to taxes. Some of this, though, is a stretch. For example, the estate tax would only be relevant if you’re estate was going to be larger than the relatively generous exempt amount. This assumes you do not shelter your earnings either as unrealized capital gains or inside a 401K/IRA but the general point is valid. You do suffer a lower incentive with Obama’s plan than with McCain’s and that is a real cost.
But what is even more fascinating is the ‘no tax’ case where the incentive is a whopping $28 (nearly 6 times as much as with McCain’s supposedly ‘market friendly’ plan). Why not simply propose no taxes?
Here is where Ceteris Paribus isn’t so much of a helpful friend. We during the ‘good years’ of the Bush administration we ran up over a trillion dollars of debt. In the blink of an eye, at the last moments of the Bush years, we just added another $1-3 trillion (depending on how you count the bailout combined with various ‘guarantees’ by the Federal Reserve and Treasury Dept).
There are two sides to the incentive to earn that extra $1. The first, of course, is the relatively easily measured tax implications of earning that extra $1. The arithmetic might get a bit complicated but it’s basically simple stuff. The second, though, is exactly how easy is it to earn that extra $1? Is spending 3 weeks looking for work as good as hopping on Craig’s list and discovering the local store is willing to pay you to spend a night helping them do their year end inventory? Certainly not and that has nothing to do with tax rates.
The question then is assuming we adopt a policy of lowering tax rates, what will that do to the economy over the long run after we have been aggressively adding to our debt and spending? If you answer is ‘everything will be great’ you are either totally deluded or you have discovered the ‘free lunch’ (hike government spending, drop all tax rates to zero and everyone will be happy). The non-existence of the free lunch is one of the few truths economics has that is non-debatable.
Mankiw, though, creates an artificial free lunch by the cleaver deployment of ceteris paribus. Because ‘all else is held equal’ the economy says nothing as tax rates are lowered as the government absorbs trillions in debt. All we are left with is asking ourselves do we prefer to have more incentive or less incentive…if only life were that simple.
McCain’s health plan is $0 you know. What sort of plans of his is he going to be able to push though a Democratic locked Congress?
Here we meet the old friend of economists, ceteris paribus or “all else being equal”. There are real relationships between variables in our world. If you raise the price of something, people will buy less of it and vice versa. But lots of stuff is always happening. You may raise the price of something and end up with more sales because people have suddenly decided it is popular, or because something else is sold out and this is the next best thing or any one of an uncountable number of possible scenarios.
So we usually say, without actually saying it, that if everything else stays the same then something will happen if a certain other thing happens. Raise the price and you’ll get fewer sales. If the price of milk skyrockets, coffee demand will probably fall (most of us don’t drink it black) and you can probably come up with a million other examples.
In this debate the response is a bit unfair. Of course neither candidate’s plan will ever be enacted as currently written. If McCain, through some odd chance, wins the election he will face a very angry and very Democratic Congress and even if he is serious about pushing his healthcare plan, it almost certainly would end up dead on arrival or drastically changed in its final form. But if we are going to ask who is ‘more socialist’ we should try to hold everything else constant. What is Obama’s plan, what is McCain’s plan and let’s try to measure ‘how socialist’ they are. If we are going to try to predict what type of policies will actually be passed 1, 2, or 3 years from now we are going to have to play a lot of speculative games. McCain, for example, might agree to a ‘very socialist’ health plan in exchange for Congress not yanking the funding for an extended Iraq occupation. A President Obama might have to ditch healthcare if the financial collapse makes gov’t borrowing impossible. (Don’t get me wrong, I think this whole socialism debate is nonsense. In less than a month we just decided to spend almost a trillion dollars to buy up banks, bad debt and bail out huge companies….the ‘socialism’ argument at this point is a bit like the arguments over Star Trek versus Star Wars...except the people who get impassioned about that are typically more reality grounded).
But Ceteris Paribus isn’t always our friend. Over on Greg Mankiw’s blog, he has a fascinating post comparing work incentives under Obama versus McCain’s tax plans.
Basically he looks at a no-tax world. Assume you work today to feed yourself and your family and provide a standard of living that you find acceptable. You would take on extra work (an hour of overtime, a side job, etc.) primarily to benefit your kids by being able to leave it to them. If you earn $1 extra today, he estimates that it would benefit his kids by $28. Why? No taxes plus compound interest.
Under McCain’s plan the benefit is $4.81 and Obama’s it is $1.85. This is, of course, due to taxes. Some of this, though, is a stretch. For example, the estate tax would only be relevant if you’re estate was going to be larger than the relatively generous exempt amount. This assumes you do not shelter your earnings either as unrealized capital gains or inside a 401K/IRA but the general point is valid. You do suffer a lower incentive with Obama’s plan than with McCain’s and that is a real cost.
But what is even more fascinating is the ‘no tax’ case where the incentive is a whopping $28 (nearly 6 times as much as with McCain’s supposedly ‘market friendly’ plan). Why not simply propose no taxes?
Here is where Ceteris Paribus isn’t so much of a helpful friend. We during the ‘good years’ of the Bush administration we ran up over a trillion dollars of debt. In the blink of an eye, at the last moments of the Bush years, we just added another $1-3 trillion (depending on how you count the bailout combined with various ‘guarantees’ by the Federal Reserve and Treasury Dept).
There are two sides to the incentive to earn that extra $1. The first, of course, is the relatively easily measured tax implications of earning that extra $1. The arithmetic might get a bit complicated but it’s basically simple stuff. The second, though, is exactly how easy is it to earn that extra $1? Is spending 3 weeks looking for work as good as hopping on Craig’s list and discovering the local store is willing to pay you to spend a night helping them do their year end inventory? Certainly not and that has nothing to do with tax rates.
The question then is assuming we adopt a policy of lowering tax rates, what will that do to the economy over the long run after we have been aggressively adding to our debt and spending? If you answer is ‘everything will be great’ you are either totally deluded or you have discovered the ‘free lunch’ (hike government spending, drop all tax rates to zero and everyone will be happy). The non-existence of the free lunch is one of the few truths economics has that is non-debatable.
Mankiw, though, creates an artificial free lunch by the cleaver deployment of ceteris paribus. Because ‘all else is held equal’ the economy says nothing as tax rates are lowered as the government absorbs trillions in debt. All we are left with is asking ourselves do we prefer to have more incentive or less incentive…if only life were that simple.
