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'Jane Galt' proposes a tax system that many economists would favor:
It seems to me that the resulting system would be efficient and progressive. However, I think that we need to provide young people with an incentive to opt out of Social Security. I would concoct some kind of IRA scheme where in exchange for taking a higher retirement age you get some tax-advantaged savings.
UPDATE: I also would raise the tax on gasoline. There is no painless way to reduce our dependence on foreign oil. A higher gas tax--or a tariff on oil imports--would reduce our dependence in the least painful way.
Discussion Question. Which parts of this tax simplification proposal would be most difficult politically?
Federal Reserve Board Governor Ben Bernanke makes the case that deflation will not happen in the United States.
I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape...The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself.
Bernanke points out that if deflation brought short-term interest rates to zero, the Fed could shift its attention from the Federal Funds rate to, say, the two-year Treasury note. Alternatively, the Fed could try to restore inflation by intervening in foreign exchange markets to reduce the value of the dollar.
Discussion Question. Bernanke blames Japan's deflationary experience on "political gridlock." Why is he confident that the United States would not experience similar gridlock?
Federal Reserve Board Governor Don Kohn gives a solid overview of mainstream economic thinking concerning the large U.S. trade deficit.
It is crucial in thinking about this deficit to keep in mind that, to the extent that it reflects an imbalance, the imbalance is shared around the world. The U.S. current account deficit is two-sided: Low saving relative to investment demand in the United States necessarily implies the reverse--a shortfall of domestic demand relative to production in the rest of the world. Therefore, any adjustment that proves necessary will also be shared around the world and will not fall solely on the United States.
Kohn also points out that a few years ago there were forecasters who said that if stock prices declined in the U.S. then that would trigger a flight from the dollar. Yet this has not occurred. The world still prefers U.S. assets. He says that at some point this preference has to shift.
At some point, reflecting both the decline of marginal returns as resources shift toward stocks of U.S. capital and other durable assets and the inevitable flagging in the willingness of investors to place an ever-increasing share of their portfolios in dollar-denominated assets, the net flow of saving to the United States will taper off.
Discussion Question. Kohn is making the reasonable assumption that there are diminishing returns to investment in any particular country. Is it possible to make a case for increasing returns? Does investment lead to more innovation, which leads to more profitable investment?
What would happen if all of CEO compensation could be taken away and redistributed to shareholders or ordinary workers? Not much, according to Zimran Ahmen, who did the arithemetic.
total CEO pay in 1991 was $6B out of an organizational market capitalization of $9.1 trillion...if they were to work for free and all the money went to employees, the average employee salary would go up $54.
UPDATE: a reader correctly pointed out that $6 billion is a flow and $9.1 trillion is a stock. To equate the dimensions, multiply the CEO compensation by a price-earnings ratio of 25. Alternatively, divide the $9.1 trillion in market capitalization by 25. Either way, it is clear that if CEO's did the same work for free, shareholders would gain very little.
Discussion Question. Ahmed says that what is wrong with CEO compensation is that stock options are not indexed to close competitors. Why would such indexing improve the relationship between compensation and executive performance?
Brad DeLong points to forecasts of a government budget crisis, driven by Medicare.
Dan Crippen, head of the Congressional Budget Office, says the real issue is: How much of our children's economy are we going to take to support ourselves in retirement? Look at the world his way, and there are just two moving pieces: How much are we promising future retirees? And how big will tomorrow's economy be?
Those really are the only two moving pieces. And the easiest policy instrument for the government to tune is the retirement age.
Discussion Question. It appears from the graph that Medicare/Medicaid spending is projected to rise from about 3 percent of GDP today to close to 10 percent of GDP in 2030. What is the basis for this type of forecast, and what factors could cause errors in either direction?
James Miller points out that the most productive tax cuts will reduce marginal rates.
Giving workers a lump-sum payment does nothing to reduce marginal tax rates because everyone would still pay the same amount in taxes on their next dollar earned. Consequently, lump-sum payments don't reduce the negative economic effects of taxation. In contrast, reducing the Social Security tax increases most workers' after-tax take home pay for their next hour worked.
Miller also discusses the problem of reducing marginal tax rates for low-income taxpayers.
Government subsidies to the poor often decrease as income rises. Consequently, reducing subsidy penalties for the employed poor reduces marginal tax rates for the non-working poor.
Discussion Question. With subsidy programs, such as food stamps, the tendency is to phase out the subsidy quickly to avoid the expense of paying benefits to middle-class recipients. What does this do to marginal tax rates?
Brink Lindsey quotes a Nobel Prize-winner on the importance of institutions for economic success.
"How effectively agreements are enforced is the single most important determinant of economic informance," states Douglass North, a pioneer in the fast-growing field of institutional economics. The rich countries of the West thrive because their institutions — both the "hard" institutions of police, courts, and bureaucracies, and the "soft" institutions of cultural values — allow agreements to be enforced between total strangers across the span of years and continents.
Discussion Question. Lindsey gives the example of being able to rent a car simply by presenting a piece of plastic. What institutional arrangements are necessary to make this possible?
Ronald Bailey attempts to explain economic growth to environmentalists, who
concentrate solely on the environmental commons and ignore another commons that addresses and solves problems that arise in the environmental commons. Let's call it the knowledge commons. We all draw from the knowledge commons, which consists of the growing pool of institutional, scientific, and technological concepts, and the wealth and capital they create. It is true that the earth is finite, but it is also true that human creativity is not.
He cites various statistics, including
since1970 the U.S. economy has nearly tripled in size, while air pollution has been reduced. Ambient levels of sulfur dioxide and carbon monoxide, for example, have dropped more than 75 percent since the 1960s.... Forests are expanding, and water use per capita in the United States has been going down for two decades.
Discussion Question. How would you explain to a non-economist why we will not run out of resources?
Ilkka Tuomi makes a number of points concerning Moore's Law.
Strictly speaking there is no such Law. Most discussions that quote Moore's Law are historically inaccurate and extend its scope far beyond available empirical evidence. Indeed, sociologically Moore's Law is a fascinating case of how myths are manufactured in the modern society and how such myths rapidly propagate into scientific articles, speeches of leading industrialists, and government policy reports around the world.
He points out that there are various formulations of Moore's Law. Moreover, regardless of which formulation one uses--"the number of transistors on a chip will double every eighteen months" or "the cost of computing will halve every eighteen months" or another formulation--the data tend to show a greater doubling time, perhaps closer to three years. For long term predictions, such as those made by Ray Kurzweil, that difference in doubling time is very significant.
At another level, Tuomi argues against treating improvements in computing as exogenous manna from a technological heaven. Instead, he argues that they are a response to demand forces.
Discussion Question. The effect of computers on overall productivity growth is the product of the rate of productivity growth in computers and the share of computers in the economy. For example, if productivity growth in computers is 20 percent per year and the share is 6 percent, then they contribute 1.2 percentage points to productivity growth. Will the share rise or fall over the next decade, and how does your answer affect the productivity outlook?
Ray Kurzweil is an extreme optimist with regard to economic growth.
Evolutionary processes accelerate, and the returns from an evolutionary process grow in power. I've called this theory "The Law of Accelerating Returns." The returns, including economic returns, accelerate...The genome project, for example, was not a mainstream project when it was announced. People thought it was ludicrous that you could scan the genome in 15 years, because at the rate at which you could scan it when the project began, it could take thousands of years. But the scanning has doubled in speed every year, and actually most of the work was done in the last year of the project.
Kurzweil foresees ever-accelerating change, implying ever-accelerating economic growth.
Discussion Question. Kurzweil predicts that we will see as much change in a decade in this century as we saw in the past 100 years. Does this seem plausible?