The Simpson-Bowles Social Security Plan

Chuck Blahous identifies the winners and losers.  The three main groups of winners:

1) Low-income workers (and their advocates);
2) Fiscal conservatives concerned about the growth of system costs;
3) Advocates of bipartisan accomplishment.

And three main groups of losers:

1) Advocates of making substantial tax increases inevitable through prolonged inaction;
2) Advocates of improving intergenerational equity via personal accounts;
3) Senior-scaring political opportunists.

How to Improve Dodd-Frank

Oliver Hart and Luigi Zingales have a suggestion about how to improve the financial reform law.  Their goal is to "spare the most vibrant financial institutions from the rigidities and bureaucratization that a strict application of the Dodd-Frank bill would entail."

Barro on QE2

Via the Economist.

Department of "Huh"? (Why Oh Why Can't We Have a Better Blogosphere? Brad DeLong Edition)

Brad DeLong objects to my recent NY Times column by displaying some Tax Policy Center data that, he says, shows the Bowles-Simpson tax plan is hard on the poor and easy on the rich.  Progressives, he concludes, should oppose the plan.

The problem, however, is the benchmark used in this particular table: current law as of 2015.  Under current law, all of the Bush tax cuts expire, and millions of new taxpayers are hit by the AMT.  That is an outcome that has never been in effect and that neither political party endorses.  It is an artifact of legislative history.

A better benchmark, as noted by Howard Gleckman of the Tax Policy Center, is current policy.  Here are those results.  The implication is exactly the opposite.  All income groups take a hit, particularly those at the top of the distribution.

Taxes, Spending, and Semantics

Click here to read my column in Sunday's New York Times.

The Progressivity of Bowles-Simpson

Howard Gleckman reports,

The Tax Policy Center has taken a preliminary look at one version of the tax plan offered by Erskine Bowles and Alan Simpson. And Paul Krugman & friends can rest easy. The Bowles-Simpson proposal is indeed an across-the-board tax increase-- and a fairly progressive one at that. In 2015, the lowest earners would face an average cut in their after-tax income of 3.4 percent or about $400. Middle-income households (those earning an average of about $60,000) would see their after-tax incomes fall by 4 percent or about $1,900. On the other end of the economic food chain, the top one percent of earners (who earn an average of about $2 million) would lose about $77,000 (5.3 percent) while the top 0.1 percent would see their after-tax incomes cut by nearly 8 percent, or close to $500,000.

The TPC estimate comes with a number of caveats. It assumes essentially the law we had in 2009. The 2001 and 2003 tax cuts still apply in 2015, about 25 million middle-income households continue to be protected from the Alternative Minimum Tax, and the 2009 estate tax is back on the books. Given political realities these days, that guess is a good as any, but it is a guess....

The TPC estimate is also static, thus it assumes no behavioral response to the proposed tax law changes. However, thanks to lower marginal rates and the smaller deficit in the overall plan, the economy could grow faster than the co-chairs predict and generate more tax revenue....

Thus, Bowles and Simpson have a clear goal: They want to raise taxes across the board while lowering rates. And TPC’s preliminary projections suggest that’s pretty much what they’d do.

QE2

Several people have asked my opinion of the Federal Reserve's new round of quantitative easing.  In particular, some have noted that I did not sign the open letter by conservative economists critical of recent Fed actions.

My view is that QE2 is a modestly good idea.  I say it is a "good idea" because, like Ben Bernanke, I am more worried at the moment about Japanese-style deflation and stagnation than I am about excessive inflation.  By lowering long-term real interest rates below where they otherwise would be, QE2 should help expand aggregate demand.  I include the modifier "modestly" because I don't expect these actions to have a very large effect.

Moreover, I do see some potential downsides.  In particular, the Fed is making its portfolio riskier.  By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort.  If future events require higher interest rates, the Fed will end up making losses on its portfolio.  And even if doesn't recognize these losses (by not marking to market), it could end up paying more interest on newly expanded reserves than it is earning on its newly acquired portfolio of long bonds.  Such a cash-flow deficit could potentially undermine the Fed's political independence (which is already not very popular in some circles).  Yet if the Fed tries to avoid these losses by failing to raise rates when needed, inflation could indeed become a problem down the road.  I trust the team at the Fed enough to think they will avoid that mistake.

So, in the end, I judge QE2 to be a small but risky step in the right direction.

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Addendum: While I do not agree with its conclusion, I did find this video on QE2 amusing.

Hubbard on the Bowles-Simpson Tax Plan

Glenn likes it.

You Fix the Federal Budget

It takes about a minute.  Persuading your fellow citizens may take a bit longer.

Help me find the photographer

The above picture, taken in the midst of the Zimbabwe hyperinflation and posted around the internet, illustrates well how fiat money can become nearly worthless when the central bank creates too much of it.  I was hoping to put the photo in the next edition of my textbook, but my publisher is having trouble locating the photographer from whom to obtain reprint permission.  If you are photographer, or know his name and contact information, or have a similar picture for which you hold copyright, please contact me.

The Simpson-Bowles Social Security Plan

Chuck Blahous explains it.

Good Signs from the Deficit Commission

Early reports suggest the Bipartisan Deficit Commission is considering some good ideas: a higher retirement age, lower tax rates coupled with broader tax bases, eliminating tax expenditures such as the mortgage interest deduction, and a higher gasoline tax.

My regular readers will know that these are ideas I have long embraced.  I look forward to seeing more details.

Update: Some details are here.

Raise the Early Retirement Age

Says Andrew Biggs.

Thaler on the Estate Tax

He is in favor.  I am not.

Laura Tyson and Me on NPR

A QE2 Ditty

Reader Dave Stehman sends in the following:

It's Called Quantitative Easing

I heard it in the headlines
It's news all over town
We might be double dippin'
Green shoots have all turned brown

It's a balance sheet recession
With a housing overhang
But they've got a brand new program
And it will start you with a bang

And it's called, quantitative easing
They say results are always pleasing.
When liquidity all starts freezing
Just warm things up with quantitative easing

I will say it straight and simple
It's clear, just like a bell
There's some long term bonds to buy
There's some short term bonds to sell

Don't talk about the good times
Don't ask me where they went
Just move your inflation target
On up to three point five per cent

And it's called, quantitative easing
This ain't no joke, it ain't no teasing
When the GDP starts wheezing
Treat with a shot of quantitative easing

Good and magic things will happen
It might take a week or three
Unemployment plunging downward
Recovery shaped just like a V

You'll see Nobels at the Treasury
There'll be rock stars at the Fed
It'll take hair off of Krugman's face
Put it on top of Ken Rogoff's head

And it's called, quantitative easin'
This ain't no scam, so don't call no policeman
When the engine of commerce starts seizin'
Just add a quart or quantitative easin'

Show no mercy to the critics
Don't let no one stop your nerve
You can mock Ricardian Equivalence
You can laugh at the Laffer Curve

Tell that guy at the Minneapolis Fed
To shut up, or you'll break his legs
And if the Bond Vigilantes don't like it?
Well, they can go suck eggs

And it's called quantitative easin'
You know I say this for a reason
When the economy just sits there squeezing
Loosen things up with quantitative easing

Malkiel's Recommended Reading

Burt Malkiel, who taught me econ 101, suggests five books on investing.

Feldstein on QE2

My Harvard colleague Marty Feldstein is skeptical about quantitative easing.

Is Obama a Keynesian?

From Saturday's DC Rally