Glazed Intervention

The NY Times' Dealbook reports on the latest measure to address the credit crunch, from Krispy Kreme.

Competition in the Antitrust Business

The Times reports:

The Justice Department laid out a broad policy on antitrust enforcement on Monday that drew an unusually sharp rebuke from three federal trade commissioners, who said it would protect monopolies from prosecution.

A 215-page report from the Justice Department, coming after nearly a year of public hearings, was originally meant to lay out a governmentwide approach to combating anticompetitive business practices. Instead, it exposed a rift between the Justice Department and the Federal Trade Commission over whether the government was protecting consumers or big businesses.

In a quick response to the Justice Department report, three of the four commissioners on the F.T.C. issued a statement saying that the policy was “a blueprint for radically weakened enforcement” against anticompetitive practices. They said the Justice Department guidelines allowed monopolies to act “with impunity” and “would make it nearly impossible to prosecute a case.”

This is far outside my bailiwick, but it sure sounds like a good thing that the Justice Dept. does not have a monopoly on antitrust. Hm... I wonder would Cournot or Bertrand be more appropriate to model this duopoly? (And that's all the I.O. I know..)

Unemployment vs. Output

Last week's employment report from the BLS had unemployment rising from 5.7% to 6.1% in August. As Brad DeLong, James Hamilton and others note, it sure looks like a recession:But past recessions have also been clearly visible in data for output growth:The "recovery" looks pretty anemic by historical standards, but there is not the sharp drop in output growth (yet?) that we've seen in past recessions. As Krugman puts it:

[T]his is an odd slowdown, by historical norms: no clear decline in GDP, no months of 6-digit job losses. Instead, the economy is being slowly ground down.

What I suspect, however, is that this is what the 21st-century business cycle looks like. The sharp slumps of the past partly reflected an inflation-prone environment, in which the Fed occasionally had to slam on the brakes; it also reflected a mainly goods-producing economy, with lots of inventories, in which recessions had a lot to do with inventory adjustments.

Among other things, rising output and falling employment implies that labor productivity is doing well (indeed, the BLS reported 4.2% growth in the second quarter). Usually, that's good news. Hm...

Equal Time

Not really, but I should point out that Martin Feldstein and John Taylor, eminent economists both, make the case for McCain's tax proposals in the WSJ.

Some debunking here. See also the Tax Policy Center's study.

Also, Feldstein and Taylor recycle the misleading claim about the US corporate tax rate being the "second highest among all industrial countries," which is debunked here.

Fundamentally Sound?

In the Times, a useful reminder from Louis Uchitelle of the inadequacy of Gross Domestic Product as a proxy for economic well-being. He writes:

While the G.D.P. has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Other shortcomings have become apparent. The boom in prison construction, for example, has added greatly to the G.D.P., but the damage from the crimes that made the prisons necessary is not subtracted. Neither is environmental damage nor depleted forests, although lumbering shows up in government statistics as value added. So does health care, which is measured by the money spent, not by improvements in people’s health. Obesity is on the rise in America, undermining health, but that is not subtracted.

Those are some of the bigger issues, but last week's upward revision of the second-quarter growth rate up to 3.3% (from 1.9%) illustrated the disconnect that sometimes exists between economic statistics and perceptions in the short run.

At Econbrowser, Menzie Chinn looked into the numbers, asking "why does it feel like recession?" As he notes, much of the growth is coming from net exports (i.e., NX in the equation GDP = C + I + G + NX); with both increasing exports and decreasing imports. That is, in part, the declining dollar at work... the price deflator for exports rose at a 10.9% rate, and import prices were rising at a 28.5% pace (!!; the second quarter included a big run-up in oil prices, which has since partly reversed...). Hence a divergence between inflation for gross domestic purchases (C+I+G), at 4.2% and overall (GDP deflator) inflation of 1.2%.

The news on output growth was too good to be credible for some - the conspiracy theories appear to focus on the deflator calculations. Devotees of Okun's law will note that a 3.3% real GDP growth rate does not appear consistent with unemployment rising from 5.1% to 5.5% during the quarter.

Update (9/3): Macroblog on the deflator issue.

Obama the Healer (of Krugman's Blues)

Paul Krugman, Aug. 4:

Post-partisan depression

Obama’s big economy speech, last week:

Back in the 1990s, your incomes grew by $6,000, and over the last several years, they’ve actually fallen by nearly $1,000.

“Back in the 90s?” Why not, “When a Democrat was president?” “Over the last several years?” Why not, “under Bush?”

A prominent Democratic Hillary supporter once told me that Obama gives him “post-partisan depression.” Indeed — his apparent unwillingness to take such clear shots is starting to seem bizarre.

Barack Obama, Aug. 28:

You see, you see, we Democrats have a very different measure of what constitutes progress in this country.

We measure progress by how many people can find a job that pays the mortgage, whether you can put a little extra money away at the end of each month so you can someday watch your child receive her college diploma.

We measure progress in the 23 million new jobs that were created when Bill Clinton was president...

(APPLAUSE)

... when the average American family saw its income go up $7,500 instead of go down $2,000, like it has under George Bush.

Limits of Tax-Based Redistribution

Washington Post columnist Steven Pearlstein makes some good points about inequality, and Barack Obama's plans to chip away at it through the tax code, by lowering taxes for middle- and lower-income people while raising them at the top. Pearlstein writes:

Two things to note about the Obama tax plan:

First, there is little evidence that the proposed tax increases on high-income households would seriously harm the economy. The effective average tax rates at the top would be about the same as they were in the mid-'90s, which if memory serves were boom years for investment and entrepreneurship, boom years for the U.S. economy, and boom years for federal revenue.

Second, even with the Obama tax plan, the distribution of after-tax income would still be roughly where it was only four years ago.

The reality is that the market's tilt toward unequal outcomes is now so strong that you can't just rely on a progressive tax code to counteract its effects...

How True This Is

Piled Higher and Deeper examines "How Professors Spend Their Time."

An Effective Stimulus?

As I noted recently, the effects of the fiscal stimulus tax rebate should be judged relative to the counter-factual of how consumption and output would have behaved in the policy's absence. This, of course, is unobservable, but Christian Broda and Jonathan Parker have found a clever way around this problem. They exploited the fact that the checks went out in a staggered fashion and compared the behavior of the households that had received checks with those whose hadn't come yet.

In a Vox column describing their findings, they report that the policy did work, after all. A couple of the main conclusions:

[T]he average household increased its weekly expenditures on non-durable goods by 3.5% after receipt of the rebate. The impact is highest in the week where the rebate is received (not reported) with weekly spending increasing by almost 6% on average during the first week. We find no impact on spending in the few weeks prior to the receipt of the rebate.

Interesting - economic theory would imply that households should change their consumption when they get the news of the stimulus, rather than waiting for the check actually arriving. This suggests that households are either myopic, or that credit constraints are binding.

Overall,

[O]ur estimates imply that the receipt of the tax rebates directly raised nondurable PCE by 2.4% in the second quarter of 2008 and will raise it by 4.1% in the third quarter.

Update (8/20): Macroblog (hooray, it's back) weighs in.

Marginal vs. Average Obama

Alex Brill and Alan Viard of the (right-wing) American Enterprise Institute argue that "Senator Obama's proposed 'tax cuts for the middle class' are actually marginal rate hikes in disguise." Note the word marginal - that is, the share of an additional dollar of income that is paid in taxes. The basic point of their analysis is that when you have tax deductions and credits that are targeted at lower- and middle-income households and therefore "phase out" over different ranges of income, the marginal rates can be high because people are losing some of their deductions and credits as their income rises, on top of the regular tax rate.

Brill and Viard analyze a specific example (carefully chosen, one suspects):

These are the marginal rates in 2009 for a two-earner couple with two children—a college freshman and a 12-year-old receiving after-school care—under some specific assumptions. For comparison, the dotted line on the chart illustrates the effective tax rates under current law. The rates shown in the chart are not spelled out in the tax code; they are the result of giving and taking away tax breaks as the household’s income changes.

What accounts for the higher rates? First, Obama expands the maximum child and dependent care credit for families with one young child from $1,050 to $1,500 and phases down the credit over a longer income range, from $30,000 to $58,000. Throughout this income range, the credit is phasing out at a rate of $30 per $1,000 of income, thus raising the effective tax rate by 3 percentage points. Obama also makes certain credits refundable, which introduces a tax penalty of 10 percent or 15 percent, depending on the income bracket

While Obama has publicly embraced a tax rate of 40 percent for couples earning over $350,000, his tax policies would result in a staggering 45 percent effective marginal rate in the $110,000 to $120,000 income range for this family. That is 11 percentage points higher than under current law.

The culprit in this case is Obama’s proposed reform of the Hope Scholarship Tax Credit for college tuition, which he would rename the “American Opportunity Tax Credit.” He would increase the credit’s maximum value from $1,800 to $4,000 while still phasing out the credit over the same income range, $100,000 to $120,000. The larger phase-out would boost the penalty on work from 9 percentage points to 20 percentage points.

It is important not to lose sight of the fact that, overall, average tax rates - i.e., the share of income paid in taxes - for households in the lower 80% of the income distribution are lower under Obama's proposals than under (i) McCain's proposals, (ii) a scenario where the Bush tax cuts and patch of the alternative minimum tax are extended and (iii) current law, which includes the scheduled expiry of the 2001 and 03 tax cuts in 2010. This chart is based on the Tax Policy Center's analysis: (Specifically, Tables T08-190, T08-201 and T08-0207; for Obama this does not include the possible modification of the cap on social security payroll taxes, which could further increase rates at the top).

So, for the vast majority, the tax burden will be lower under Obama's proposal. However, the structure of the plans means that marginal tax rates could be high for some "middle class" households. Is that a problem? Sort of, maybe. It is the marginal tax rate that affects incentives - e.g., the benefit of working overtime or taking a second job would depend how much of the additional income you actually take home. Higher marginal tax rates would be expected to distort people's decisions more. So, if this actually causes people to change their behavior significantly, it is problematic. Most economists would agree on that, in principle, but the magnitudes matter, and much of "conservative" thinking on taxes seems to rely on an exaggerated view of the size of the effect.

Matthew Yglesias notes that real problem with Obama's tax proposals may be that they won't bring in enough revenue to meet public needs.

Via Economist's view, Brill and Viard's analysis taken apart.

Obama economic advisors Furman and Goolsbee explain his plan in a WSJ op-ed.

Update (8/17): Via Mankiw, more explanation from Viard.

Update #2 (8/17): EconomistMom says: "Alex and Alan are trying to make a big deal out of a small point, and a small point that has hardly any policy relevance." And she has evidence.