Confessions of a Supply-Side Liberal

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Posts tagged principles

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Neil Irwin: American Manufacturing is Coming Back. Manufacturing Jobs Aren’t

Sometimes a sector of the economy has so much technological progress that over many decades, output in the sector increases while inputs into the sector—particularly the amount of labor used—decreases. Agriculture went through this transformation first. In more recent decades, manufacturing employment has been shrinking while manufacturing output has been growing. Just as we need only a few farmers to feed everyone, we are moving toward a world where we only need a few people to manufacture things, while almost everyone is employed in the service sector.

Neil Irwin describes this transformation in his post "American manufacturing is coming back. Manufacturing jobs aren’t."

Filed under principles growth laborio class

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How Marginal Tax Rates Work

Here is an exercise. What is wrong with the way the people quoted below are thinking?

1. Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.

Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.

“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.

2. … [the extra money that comes with a raise] “is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise.”

For an answer, see the wikipedia entry on “Tax Rate” and Matthew Yglesias’s posts "Nobody Understands How Taxes Work,"  "Tax Whiners Don’t Understand How Marginal Tax Rates Work," and "Tax Ignoramuses."  

Filed under principles class

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International Finance: A Primer


Foreign currency

In this post, I want to lay out the basics of international finance at the level of my Principles of Macroeconomics class. Trust me, it will be worth it. There are many points about economic policy I have wanted to make on this blog that I have been unable to make without first laying the groundwork with a discussion of international finance like this. This post focuses on international finance in the long-enough run that aggregate demand is not an issue. So any discussion of monetary policy will have to wait for another post: “Short-Run International Finance: A Primer” to come. Also, the longer run focus of this post will show up when I talk about an increase in the national saving rate as a good thing—which I think it will be, about five years from now. But right now (2012) it would be good for people to spend more, as I assume in my posts so far about short-run fiscal policy and about monetary policy.  

I use Greg Mankiw’s Brief Principles of Macroeconomics in my class; I like his treatment of international finance very much. Underneath the surface, Greg’s treatment of international finance has two key foundational pillars:

  1. People have definite ideas (somewhat independent of the true distribution of returns on those foreign assets) about how much in the way of foreign assets they want among the assets that make up their wealth     
  2. Foreign currency is a hot potato that people want to get rid of. 

Let start by discussing these two foundational pillars in turn.

Read more …

Filed under principles money finance

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Greg Ip on Barack Obama's Performance as Steward of the Economy

This is an excellent discussion by Greg Ip of how Barack has done in his economic policy choices and the economic role of presidents in general. 

Note: The appropriate judgment of Barack’s performance would be much different if the many ways to stimulate aggregate demand

  1. without adding too much to the national debt and 
  2. in an environment where short-term interest rates are already down to zero

had been better understood when he faced the economic challenges of the last few years.

On the many ways to stimulate aggregate demand without adding too much to the debt and in a low-interest rate environment, see my blog posts on short-run fiscal policy and monetary policy, which are nicely laid out in these two “sub-blogs” of tagged posts:

These sub-blogs of tagged posts automatically update as I add more posts with the relevant tags. I put links to these sub-blogs on my sidebar. (I will add links to other sub-blogs soon.)  

Filed under principles politics

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Nicholas Kristof: “Where Sweatshops are a Dream”

This op/ed by Nicholas Kristof is a classic that Greg Mankiw links to. I use it in my class to make two points:

  1. The value of an extra dollar (or an extra Cambodian riel) can be extraordinarily high for someone who is very poor. (See my post "Inequality Aversion Utility Functions," where I emphasize that almost all the benefits from redistribution are from helping the poor, not from transferring money from the rich to the middle class.)  
  2. Caring about helping the poor does not always mean one should support policies recommended by activists who say they care about the poor.  

A number of policies recommended by those who say they care about the poor have the common element of saying, in effect:

If you can’t or won’t create a good job, don’t create a job at all.

For some people, a “bad job” is a lifeline. And if we insist that only good jobs should exist, they will have no job.    

I think there is another element behind opposition to sweatshops. When people in poor countries are suffering before the arrival of an American company in their backyard, that hideous suffering from poverty is out of sight for us in America. But as soon as the American company arrives to give the opportunity of taking what look like bad jobs to us, if they choose to, the somewhat lesser suffering of their poverty after taking the “bad job” seems like the fault of the American company for not making the jobs nicer. In fact the company has helped them, but we only see the suffering from poverty after, not the hideous suffering from worse poverty before.

One factor that can make it easier to blame the American company for the suffering left after providing the job is that some of the corporate executives involved in setting up and running the new factory in a poor country may, in fact, be uncaring, unfeeling people (though I doubt this is true anywhere near as often as people suppose). But even if many of the corporate executives involved in setting up and running the new factory are uncaring, unfeeling people, it doesn’t change the fact that, by their actions of setting up and running the factory, they have made people’s lives better. They could have made people’s lives better still if they had taken a bigger fraction of their personal earnings and donated it to helping the poor than they actually did, but that is something that can be said for almost every American. 

One policy change that could increase what Americans do to help the desperately poor in other countries is the program of “public contributions” I recommend in my post "No Tax Increase Without Recompense." That program of public contributions would dramatically increase the amount of assistance American give to the desperately poor in other countries. Government-funded foreign aid is very unpopular—and often is relatively ineffective because much of it is channeled through corrupt foreign governments. But many individuals (with whatever money they have set aside to donate to good causes) are attracted by the idea of helping the desperately poor.  

Filed under redistribution principles poverty politics growth laborio class

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Noah Smith on the Demand for Japanese Government Bonds

In this post, Noah Smith argues that the price of Japanese government bonds (JGB’s) is still high (which is the same thing as saying the interest rate on Japanese government bonds is still low) despite the size of the Japanese government debt because people believe that the Japanese government will raise taxes in the future.  

Towards the end of his post, Noah raises the possibility of negative real interest rates as another way to deal with the debt. This seems quite possible to me. If confidence in the willingness of future Japanese governments to raise taxes falls, then the price of JGB’s will fall and their interest rates will rise significantly above zero. In that situation there would be more room for the Bank of Japan (BOJ) to push interest rates on JGB’s down toward zero again (and equivalently, push prices of JGB’s up) to stimulate the Japanese economy. If that stimulus raises inflation to the 2% per year rate that the Bank of Japan has said it wants, then real interest rates could easily be -2% (a nominal interest rate of 0 minus inflation of 2%) for quite some time.  

An important bit of background is that the Japanese government seems to be able to do quite a bit to twist the arms of insurance companies, regional banks and pension funds to get them to continue to hold JGB’s, as Noah argues in his earlier post "Financial Repression, Japanese Style." And the pension funds in turn don’t give workers many choices about how to invest. That is the core of Noah’s answer to the obvious question of why anyone would ever put up with low real interest rates for JGB’s when higher real interest rates are available on foreign assets.

Filed under principles longrunfiscal