The President's Rosy Scenario

I have been looking through the Obama administration's midsession review, which was released a few days ago.  I found the comparison between the adminstration's economic forecast and the Blue Chip consensus of private forecasters noteworthy.  (See the table called "Table 3. Comparison of Economic Assumptions.")  Here is the projected growth of real GDP, fourth quarter to fourth quarter, of Team Obama in red, and private forecasters in blue.

2012 2.6 2.0
2013 2.6 2.5
2014 4.0 3.1
2015 4.2 3.0
2016 3.9 2.9

Of course, the Administration's optimistic forecast feeds directly into its budget projection.  If we get the slower growth that private forecasters predict, we will get less tax revenue and larger budget deficits than the Administration projects.

Where is economics going?

Eight young stars take a shot at the answer.

What I've been reading

I am down here on Long Beach Island, NJ, visiting my mom with my younger son.  It has given me a chance to catch up on some reading, and I have a recommendation to pass along: Unintended Consequences by Edward Conard.  The subtitle (Why everything you've been told about the economy is wrong) is unnecessarily contentious and not really an accurate description.  But the book, written by a former Bain partner, gives a good overview of the forces behind the financial crisis.  It is far smarter and more thought-provoking than most economics written for the general public.

You can read the beginning of the book by clicking here.  Be sure to check out Figure 1-6 on page 22, which I found quite illuminating.

What I've been watching

I am a latecomer to this, but a friend suggested to me that I would enjoy the TV show Breaking Bad, and boy was he right. It has occupied me almost every evening for the past month, as I have caught up to the current season five.

The show tells the story of a particularly destructive mid-life crisis, as a mild-mannered high school teacher slowly descends into the underworld of drug manufacturing. It is not the best TV drama of all time (I would probably vote for The Wire), but it is close. It is important to watch in sequence, so be sure to start with season one.

Harry Reid's Wardrobe

Having learned that the U.S. olympic uniforms were manufactured in China, Senator Harry Reid said, "I think they should take all of the uniforms put them in a big pile and burn them and start all over again."

Will some enterprising reporter please ask Senator Reid for the opportunity to inspect the senator's closet and check the labels of his clothing to make sure they are all American-made?   I look forward to seeing Mr. Reid's bonfire.

In the alternative, I would be happy to send the senator of copy of my favorite textbook.  He should pay particular attention to Chapters 3 and 9.

The Progressivity of Taxes and Transfers

To update one of the tables for the next edition of my favorite textbook, I have been looking at the new CBO report on the distribution of income and taxes.  I found the following calculations, based on the numbers in the CBO's Table 7, illuminating.

Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received.  For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):

Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent

Top one percent: 28 percent

The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.

The most surprising fact to me was that the effective tax rate is negative for the middle quintile.  According to the CBO data, this number was +14 percent in 1979 (when the data begin) and remained positive through 2007.  It was negative 0.5 percent in 2008, and negative 5 percent in 2009.  That is, the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess.

I recognize that part of this change is attributable to temporary measures to deal with the deep recession.  But it is noteworthy nonetheless, as other deep recessions, such as that in 1982, did not produce a similar policy response.

Update: A reader points out the CBO's transfer data includes state and local transfers, but the tax data includes only federal taxes.  If state and local taxes were included, or if state and local transfers were excluded, the middle quintile might well turn positive, though the CBO does not provide the data to establish that conclusion definitively.

Anti-poverty programs raise effective marginal tax rates

Eugene Steuerle calculates the effective marginal tax rates from the system of taxes and transfers:

we calculate the effective average marginal tax rate if this household increases its income from $10,000 to $40,000. That is, how much of the additional $30,000 of earnings is lost to government through direct taxes or loss of benefits? The average marginal tax rate in the first bar of Table 3, 29 percent, is based simply on federal and state direct taxes, including Social Security and the EITC. The rate rises appreciably as the family enrolls in additional transfer programs in bars 2 and 3. For a family enrolled in all the more universal non-wait-listed programs like SNAP, Medicaid, and SCHIP, the average effective marginal tax rate could be 55 percent. Enrolling the family in additional waitlisted programs, like housing assistance and TANF, ratchets the rate up above 80 percent....

Some caveats are in order. A number of eligible households do not apply for benefits, such as the food subsidies for which they are eligible. We have performed some analyses of the population as a whole at the Urban Institute and find that the average rates across households will be lower than what you see in the table because of less than full participation in the programs. By the same token, we have not included the child care grants in these calculations. Add those in, and the rate can exceed 100 percent.

A Tribute to Anna Schwartz

Here are some words from David Romer, spoken at the beginning of the NBER Summer Institute, Monetary Economics program:

Before we begin, we have a sad milestone to note. Anna Schwartz, who was a towering figure not just in the Monetary Economics program of the NBER, but in the field of monetary economics, died last month.

The usual way to mourn someone’s passing is with a moment of silence. I think everyone who knew Anna even a little realizes that that would be absolutely the wrong way to remember her. So instead, let’s remember her this week by being loud, forceful, and argumentative, and by interrupting one another when we feel really strongly about something. To honor her, we also need to keep our discussions and debates focused on the substantive questions at hand and firmly grounded in the evidence. And we need to be flexible and open-minded, willing to cheerfully change our minds even if it’s about a position we’ve argued for tenaciously for decades – as Anna did on the question of whether targeting monetary aggregates is a good way to conduct monetary policy.

But to truly honor Anna, what you need to do is to go back to your university or wherever you work after the conference is over, and do work that’s so damn good that it changes the way we think about basic questions in macroeconomics, and that’s so damn careful and thorough that fifty years from now, it’s still the first place that people look when they want to learn about an issue that your work addresses.

And, you’ll keep doing that work for decades. To put Anna’s research longevity in perspective, if you’re currently finishing your second year in graduate school, you’re probably about the same age that Anna was when she published her first paper. To match Anna’s research longevity, you’ll need to stay actively involved in important research until about 2080.

With those lofty goals in mind, let’s turn to the conference program.

Is the Fed too timid?

Yes, say Betsey Stevenson and Justin Wolfers.

Monitoring the So-Called Recovery

A Reading for the Pigou Club

From Yoram Bauman and Shi-Ling Hsu.

Pigou Club news

From my inbox:

I thought you might be amused to see this. At Metrovino, a restaurant in Portland, Oregon where I run the bar, we needed a name for a drink we serve that's a slight variation on the Pegu Club (a classic gin cocktail). "Pigou Club" was the first thing to come to mind. I doubt many guests know what the name alludes to but it makes me happy and the drink has become one of our bestsellers. A photo of the menu is attached.  The recipe and background are here.

Also, by the way, Australia has joined the club, amidst significant controversy.

CFR on PK

The folk over at the Council on Foreign Relations say that Paul Krugman's analysis of Iceland lacks a certain..., let's say, robustness.