Asymptosis

Electability. There’s a damn good chance she could lose to McCain.

• She
  has the highest negative approval numbers of any candidate in polling
  history. (I don’t think she deserves that hatred, but there it is.) No
  presidential candidate with her negatives has ever won.

• She would turn
  out the Republicans in frantic droves. Obama would turn out Democrats
  in droves; social-conservative ‘pubs who are tepid about McCain would
  just stay home.

• If there’s another terrorist attack, McCain will be
  even more likely to win. Obama would be our only hope. I won’t list all
  the things that make Obama attractive in that scenario. They might be
  enough. The perception of Hillary as a waffler would destroy any chance
  of a win.

Governing. Deserved or not, Hillary is an incredibly divisive figure.
She’d find it difficult or impossible to forge bipartisan consensus,
even though some semi-sane ‘pubs (notably McCain) have worked with her
in the Senate. The popular pressure on Republican legislators not to
work with her would be intense. (Not even considering their own inclinations.) Short story, try as she might, she
couldn’t govern well.

Obama. We—America, and the whole world—desperately need Obama as president.
His message, his face, and his name would do more to repair America’s
place in the world, and heal the world overall, than any other
conceivable thing.

Even after his conference call with supporters yesterday (I’ve only seen a brief recap of the call), the question  remains: why? Why did he quit, and why now?

His explanations still just don’t feel satisfyingly explanatory. Party unity? Getting poverty firmly on the agenda?

Here’s what I would like to believe:

He saw that he wasn’t going to win.

He saw that Hillary getting the nomination would be a Very Bad Thing. (See next post.)

He saw that (choose how you want to put it):   1) his continuing candidacy would draw more votes from Obama than from Clinton, or 2) if he withdrew his candidacy, most of his followers would vote Obama.

He saw that if wanted to have that effect, he had to withdraw before Tsunami Tuesday.

But, obviously, if this is what he really wanted he would not only have endorsed Obama, but would have told his whole machine to throw everything they had behind the man. And told his followers to get out and vote for Obama. On top of SC and the Kennedys, it would have guaranteed an Obama win.

He hasn’t done that. And from what I’ve heard, including a recap of the conference call, he’s said some things ("keep your powder dry") that specifically contradict that message.

So I’m still confused about why he withdrew. I can imagine nothing except salutary and honorable reasons. I just can’t figure out any really cogent and satisfying reasons.

Some years ago, in one of the few instances where the NYT actually published one of my letters, I ranted about how we should institute a heavy tax on low-efficiency vehicles.

To the Editor:

Gregg Easterbrook’s proposal for a 50-cent-a-gallon increase in the federal gasoline tax (”The 50-Cent-a-Gallon Solution,” Op-Ed, May 25) is absolutely on the mark. Except that it ignores reality.

No politician would dare to propose it, and the American people wouldn’t swallow it. And despite all its benefits, there is good reason for even liberals to oppose it — as Mr. Easterbrook acknowledges, it’s nonprogressive.

Unlike income taxes (which Mr. Easterbrook proposes reducing to offset the gas tax), a gas tax would shift the tax burden to lower-income taxpayers who can ill afford it.

A better alternative: impose large taxes on the sale of low-efficiency vehicles.

Americans with excess piles of cash would be free to buy Humvees and Cadillac Escalades, but they’d have to pitch in, say, $5,000 to offset the costs of their selfishness, including pollution-related illnesses, global warming and, perhaps the most expensive of all, threats to our national security from energy dependence.

We could call it the National Security Tax.

What I didn’t realize at the time, and only discovered the other day in my web travels, is that we already have a gas-guzzler tax. Have since 1978. A hefty one. Here it is:

GAS GUZZLER TAX
Unadjusted MPG (combined)*	Tax
at least 22.5	No tax
at least 21.5, but less than 22.5	$1000
at least 20.5, but less than 21.5	$1300
at least 19.5, but less than 20.5	$1700
at least 18.5, but less than 19.5	$2100
at least 17.5, but less than 18.5	$2600
at least 16.5, but less than 17.5	$3000
at least 15.5, but less than 16.5	$3700
at least 14.5, but less than 15.5	$4500
at least 13.5, but less than 14.5	$5400
at least 12.5, but less than 13.5	$6400
less than 12.5	$7700

The problem is—this just sounded too good to be true, right?—the Gas-Guzzler Tax doesn’t tax gas-guzzlers—trucks, vans, and SUVs. And it explicitly excludes cars over 6,000 pounds. (Is it just a coincidence that the BMW Z5’s “curb weight,” according to the company, is 6,008 pounds?) And the top limit—22.5 miles per gallon, is ridiculously low.

A list of those few 2008 vehicles subject to the tax is here (PDF). About two hundred models, total. They’re all high-performance cars. I count ten American cars (five Chryslers, five GMs), and one (one!) Japanese car (Nissan’s M45X). The rest are exotic and semi-exotic European imports. Meaning that pretty much all the cars that Americans actually buy are excluded.

So while  our representatives have been muddling around with an unwieldy, anemic, and contortionally market-distorting set of CAFE standards, the perfect market-based tool for reducing oil dependency is one tweak away from being actually useful.

Just change the rules so the Gas Guzzler Tax applies to all (non-commercial?) vehicles, and call it good. For good measure, raise the top MPG limit.

Did our representatives even consider this? I can’t find any press reports suggesting they did.

Now I feel like I hardly need to detail the long list of positives associated with such a tax. (Those who oppose taxes on principle, save your stamp; I’ve heard it. We need to tax something to finance the government.)

• It causes vehicles to be priced more accurately, by putting a price tag on the many very real “externalities” that all Americans pay for, but that aren’t included in a vehicle’s cost of goods. (Things like B1 bombers, Homeland Security Departments, lung-related deaths, corn subsidies, possible global environmental pandemonium, such like that.)

• It’s much more progressive than a gas tax, because people who can afford it will be the ones who pay it.

• It harnesses the power of the market to promote many valuable economic and social goals. (National security, reduced pollution and greenhouse gases, better public health, reducing oil dependence and the resulting need for unsavory alliances, etc.)

• It leaves people the freedom to choose low-efficiency vehicles. They just have to pay the full cost.

• It’s easy to administer, because it’s paid by the manufacturer. (Who passes it on as part of the sales price.)

• Since the consumer ultimately pays it—and makes the decision whether the more-accurately-priced car is worth the money—it has all the advantages that consumption-taxers will be delighted to detail for you.

• It uses the market to send the message to automakers—make fuel-efficient cars available—that they’ll actually listen to.

• It provides revenues for the government. (I know, some wackos think that’s always a bad thing. I hope they enjoy their cave dwellings.)

Update, 2-18-08: Several people on other sites have pointed out something I only included in a tiny parenthetical: people who need low-efficiency vehicles for their work. They shouldn’t be penalized, it’s argued. I agree–as long as they truly do need it–for reasons of both fairness (they’re not just leeching off the public subsidation of negative externalities) and economics (big taxes on small business probably hurt everyone more than other taxes).

But consider: small-business owners get to write off vehicle purchases. The numbers for a purely fictional but probably representative situation:

Car cost: $30K
Tax: $5K
Tax bracket: 20%

They get to write off the whole truck, including the tax, so they save $7K. Their gas-guzzler tax is cut by $1,000—20%.

It’s not a huge difference, but it does ameliorate the impact on these folks some. And it does maintain the incentive to go with smaller, more efficient vehicle. (Which incentive is needed by tradespeople as much as by others…) I’ve tried to think of another method that doesn’t require yet more paperwork, haven’t thought of one.

Megan McArdle, in an uncharacteristically badly-reasoned (and really rather mean-spirited)  post, ridicules an increase in food-stamp benefits as a fiscal stimulus measure. I responded in her comments, but I’m so inordinately proud of my response that I can’t resist posting it here:

Geez, Megan, I’m sorry but that ranks as one of the lamer posts that
you’ve blessed us with. Unworthy of your fine mind. It (combined with
your follow-up posts) is digressive, obfuscatory, wildly anecdotal, and
barely touches the central issue of fiscal stimulus.

Point by point:

1) The poor don’t need more food.

The point of a temporary food-stamp bump is not to provide more
food; it’s to stimulate demand. If it also helps out the subset that
does need more food, or lets all food-stamp recipients buy somewhat
better food, in aggregate (perhaps reducing obesity), that’s just a
bonus.

But (acceding to your digression) c’mon: a three- or six-month bump
in food-stamp benefits is not going to have any even vaguely
significant effect on obesity among the poor, in either direction.

2) Food stamps only imperfectly translate into increased cash income, meaning that the poor will spend . . . more money on food.

And spending more money on food will increase demand. Which is the goal. (Not increasing "cash income.") Another digression.

3) If the increase in food stamps takes the form of expanded
eligibility, rather than larger grants, the administrative issues and
public outreach will delay your stimulus until well after it is no
longer needed.

Agreed. Should just push a button (figurative speech) and add money
to the existing debit cards. This is one of the best arguments *for*
this method of fiscal stimulus. *Very* little friction or delay in the
system. Straw man.

4) (it’s hard to say how much) of the food stamp spending will
simply draw down perishable stocks rather than generating new economic
activity.

Well duh. Producer and consumer elasticity means it’s not a steel
rod. But the limited research we have shows that $1 in increased
food-stamp benefits yields $1.73 in increased demand over the next
year–more effective than any other fiscal stimulus measure.

>>Eventually this will probably generate more economic activity, but probably well after your stimulus is needed.

This statement is *less true* for food stamps than for any other
fiscal stimulus measure. And see recent Krugman on timing of fed cuts
vis-a-vis unemployment and NBER "recessions."

5) The economy doesn’t need a food sector more distorted by daft government programs than it already is.

Agreed, wholeheartedly. But a short, sharp bump would have limited
distortionary effects, because it would not affect expectations. And
when it comes to government programs causing distortions in the food
market, the food-stamp program is *not* the first thing you think of.
It’s agricultural subsidies, whose pernicious effects make food stamps
looks like the tooth fairy. Red herring.

>If you want to give money to the poor, give it to them.

Helicopter drops targeted by income are extremely difficult to
implement. When there’s a system in place to do that targeting,
effectively and efficiently, why not use it?

>Even if they spend it all on drugs, it will hardly be much worse
than spending it all on increasing their already astronomical obesity
rates.

Agreed. Either way, it increases aggregate demand.

Demand-induced employment can take pressure off the Fed, which is
already starting to feel the looming and inexorable power of the
numeral zero (or, more accurately, has some reasonable probability of
feeling that looming constraint sometime this year). A diversified
portfolio of stimulus measures can make the best tool in the toolbelt
(monetary policy) more effective and flexible, arguably
counterbalancing or outweighing the undeniable inflationary effects of
fiscal stimulus.

Thanks for listening,

Steve

Oh, and I overcame my laziness and searched my hard drive to find the source for the $1.73 figure. A July 2004 analysis (PDF) by Moody’s Economy.com of Bush economic policies—notably the 2001 stimulus measures.

It’s important to note that these were the only fiscal stimulus measures that were instituted promptly (ever? certainly in many decades), so they’re sort of the only body of evidence we have to determine whether fiscal stimulus early in a downturn actually works.

It does seem to increase demand significantly over the ensuing year. Whether that’s worth the tradeoffs (stimulating inflation, increasing debt, etc.) is another question.

A related post, responding to Greg Mankiw’s objections, here.

Megan McArdle ridicules an analysis that looks at stock market returns adjusted for the dollar’s value (based on a basket of currencies).

Short story, by that measure investors have been big losers (chart) over the last seven years. The author uses it to bash Bush’s "ownership society."

Megan, who seems to be responding more to the Bush-bashing than to the analysis, thinks it’s "silliness." Which seems really silly.

First, let’s forget about whether any of this is "Bush’s fault." I have no doubt that everything that’s not to my liking these days—notably the outrageous bill I got last week from my dog’s vet—is his fault. Bastard.

But putting that well-founded certainty aside, does Megan’s critique really make sense? Nobody seems to be addressing that in the comments to her post. Does the dollar’s decline mean that equity investors are worse off?

Heck yes. (Or as my fourteen-year-old would say, "no duh.") Megan’s arguments only say that "it’s not that bad." Her ridicule of the currency-adjusted analysis isn’t justified.

She points out that:

most US imports are from "places like Mexico and China [not sure what ‘places like M and C’ means], whose currencies haven’t really altered much against ours. (To be fair, a lot of it is also with Canada and Japan, that have seen higher currency appreciation)."

Okay, maybe the currency basket being used for the calc should be imports-weighted. But the larger point remains.

Next:

"many of those places have dropped the prices of their goods and taken lower profits rather than lose sales volume."

First, note the use of "many." Which means some or many have not, will not.

And Megan knows that this is temporary stuff. In the long run the market will balance this out, and imported goods will be (even) more expensive. Wal-Mart’s got leverage, but not infinite, market-defying leverage.

So if:

1. All my wealth and income is from the market,

2. I’ve had a real (inflation-adjusted) return of zero percent since 2001 (not counting dividends, which are running what, two percent these days?), and

3. A large proportion of goods I buy are, have been, and will be more expensive (increasingly, as the lagging currency effect gets more market teeth),

I’m certainly worse off now than I was then.

And yes, it’s all George Bush’s fault!

Seriously, Megan: don’t diss the analysis (refine it instead) just because you don’t like the post-hoc conclusion.

Dang it all, but Greg Mankiw does have me going this week. Guy’s got a fine mind, want to see him applying it more acutely.

Yesterday he pointed to Alan Blinder’s 2004 The Case Against the Case Against Discretionary Fiscal Policy (PDF), wherein Blinder gives three possible reasons to use fiscal stimulus (note the “or’ here):

…there will be occasional abnormal circumstances in which monetary policy can use a little help, or maybe a lot, in stimulating the economy—such as when recessions are extremely long and/or extremely deep, when nominal interest rates approach zero, or when significant weakness in aggregate demand arises abruptly.

Mankiw points out two current/predicted conditions…

The relevant question is whether the
current situation, with unemployment at 5 percent and a consensus
near-term growth forecast of about 1 percent, qualifies as one of these
"occasional abnormal circumstances."

…neither of which (directly) addresses Blinder’s three criteria. Let’s look at them:

1. Long/deep, recession. No, but we don’t know if it will be. And let’s not forget that if fiscal stimulus is not “prompt and large,” it doesn’t do any good. Makes this criterion difficult to act on.

2. Nominal interest rates approaching zero. Nope, we’re not there.

3. Abrupt weakness in aggregate demand. This is where Mr. Mankiw could bring his considerable skills to bear in analyzing the current situation.

Greg Mankiw cites a citation of a 1994 paper analyzing fiscal and monetary responses to recessions.

From the abstract:

…Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usually small. … the interest rate falls account for nearly all of the above average growth that occurs early in recoveries.

Interesting, but it only shows that late, small fiscal stimuli don’t do any good. And since they’ve almost all been after "the trough," is it any surprise that they don’t account for any of the growth "early in recoveries"?

This in no way proves that "prompt and large" fiscal stimulus works. But it does make one wonder…

In today’s column, one the our best watchdogging financial journalists takes an odd analytical tack—toward not terribly important news.

She gets all excited about the returns calculator provided by FINRA (Financial Industry Regulatory Authority)—as she should. It has a database of the funds, so you can easily pull post-fee returns comparisons and graphs for different funds. It even creates a bar-chart comparing returns on up to three funds. Very nifty.

But—after pointing out somewhat obliquely that only an idiot would invest in load funds (“the bulk of mutual fund investors wisely choose no-load funds”)—she proceeds to compare returns on different classes of shares within load funds. Example:

If the Franklin Large Cap Value fund returned 5 percent annually for
seven years and you invested $10,000 for the period, the A shares would again generate less. An investor in the A shares would have $12,065; a holder of B shares would receive $12,241 and the C class would produce $12,250.

Over seven years, C shares beat A shares, 23% to 21%. Hardly something to write home (or the Times) about.

But if you compare the best-performing share class to a no-load ETF covering the same asset class—let’s choose the Wilshire Large-Cap Value SPDR—the differences get interesting. The seven-year return would be $3,876—39%.

So thanks, Gretchen, for pointing out this nifty calculator. It will undoubtedly have great value to load-fund investors, by demonstrating to them their own innumeracy.

Greg Mankiw uses rhetorical questions to argue that the government should not be using fiscal stimulus to prevent a recession. He asks (in my words):

If monetary policy is the strongest lever, and if fiscal stimulus limits the Fed’s monetary options—ties their hands—why are we considering fiscal stimulus?

But he’s posing it as a zero-sum game, hence an either/or decision. (Fairly typical in academe: flaming controversies asking "is X true or is Y true," when the obvious answer is "yes.")

Consider identical questions an investor might ask:

It’s clear that over the long term, small-cap value stocks outperform other asset classes.

If I put money into other asset classes, that reduces the power that small-cap value stocks have to increase my returns.

So why should I invest in any other asset classes?

This question-series-cum-argument sounds silly, because every one knows that it’s not a zero-sum choice; diversification improves the return-to-risk ratio. (It’s "the only free lunch.")

So, rather than trying to answer the $145-billion-dollar question that Mr. Mankiw is so much better qualified to answer, I will ask it of him:

Is what’s true for portfolio returns also true for efforts to stimulate the economy?

Do fiscal and monetary stimuli combine to deliver more than the sum of their parts? 

In other words, can fiscal stimulus help reduce the "risk" of unemployment, outweighing the constraining effect of increased inflationary pressure?

Greg Mankiw is a widely and justifiably respected economist. But sometimes in his blog he prattles on just like the rest of us, absent the empirics that he should be bringing to the party.

So here. He ridicules the CBO for even bothering to analyze a temporary increase in food stamp benefits to effect short-term fiscal stimulus. His reason? Vehicles for heating and cooling the economy should be symmetrical. You wouldn’t cut food stamps to cool off an economy, so why would any ninny think of increasing food stamps to stimulate an economy?

I know—doesn’t really pass the sniff test, no matter how much it’s couched in language from a particular corner of “standard macroeconomic theory.”

Credit where due: in an update he posts a reply from Jason Furman that makes a damned good case for the idea.

• It’s way easy to implement. (Push a button and recipients have more credit on their cards.)
• There’s basically no dead weight loss/friction—the money goes instantly to people who spend it.
• They will spend it immediately, resulting in quick stimulus.
• Furman doesn’t mention this triviality, but the money would also go to those who suffer most from recession.

Mankiw can’t really contest such cogent arguments, so he makes a quick shift from WMD to spreading democracy, in the form of compassion for the poor folks whose food stamp benefits would be increased. He proposes instead a variable corporate investment tax, adjusted up and down to heat and cool the economy based on economic conditions.

Accountants and tax lawyers, are you rubbing your hands at that prospect? ("Let’s see: should we accrue that investment on March 3rd or March 4th…") Can you say "audit nightmare"? Does Mankiw think this is going to be implemented in the next month, or six?

I’m thinking that the real basis of Mankiw’s objection—what’s causing him to be less than reasonable here—is the bit about how tax cuts for the rich result in so much better incentive-to-cost ratio. I’m putting thoughts in his head without his permission, but this is my blog so I’ll continue.

Arthur Laffer explains the idea here, in a December interview that’s well worth reading for its surprisingly conspicuous quantity of centric sensibleness:

The top tax bracket he [Kennedy] cut from 91% to 70%. That’s a 23% cut in tax rates with a 233% increase in incentives. That’s a 10-to-1 benefit-to-revenue-loss number.

Now you take the guy in the bottom bracket. The guy in the bottom bracket had a 30% cut in tax rates, from 20% to 14%, and he had a 7.5% increase in incentives. So that’s a 1-to-4 benefit-to-revenue-loss calculation.

That’s very persuasive theory. But it doesn’t have much to do with using food stamp benefits for immediate fiscal stimulus.

And Mankiw’s argument from compassion:

I can more easily imagine, when the
economy starts to overheat, telling corporations that their investment
credit has shrunk or disappeared than telling poor families that their
food budget has been cut.

Doesn’t have that ring of empirical authority (or authenticity) that he’s so well-positioned to provide.

Update 1/20/08: The only thing that’s changed is my own
thinking. While it’s tempting to delete this post out of mild
embarrassment, instead I’ll add.

First, the imputation I made re: Mankiw’s true reasoning doesn’t make sense. I advise (beg) readers to ignore it.

Second, here’s the real flaw in his "symmetry" argument: the two
situations aren’t symmetrical. An overheated economy is banging against
the bounds of its own capacity. An underheated economy is not. Since
the situations are not symmetrical, the responses should (or need) not
be.

I continue to maintain that his arguments about the poor abused
food-stamp recipients don’t make sense. They’ll be delighted by the
extra money, and disappointed that it doesn’t continue indefinitely.
But that type of disappointment will always be with us.