Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Sunday, May 20, 2012

Tax policy shocks and the business cycle

I have to admit that I never ascribed much importance to the idea of "tax policy shocks" as an important driver of the U.S. postwar business cycle. I thought of such shocks as perhaps playing a supporting role, along the lines of Tax Disturbances and Real Economic Activity in the Postwar United States (Tony Braun, 1994).

But I just came across a paper that has led me to re-evaluate my views on this matter: Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks (Karel Mertons and Morten Ravn, 2011). Here is the abstract:
We provide empirical evidence on the dynamics effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes using a timing-convention. We document that pre-announced but not yet implemented tax cuts give rise to contractions in output, investment and hours worked while real wages increase. In contrast, there are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary and persistent effects on output, consumption, investment, hours worked and real wages. Results are shown to be very robust. We argue that tax shocks are empirically important impulses to the U.S. business cycle and that anticipation effects have been important during several business cycle episodes.
There's a lot of interesting material in this paper, and I encourage anyone interested in understanding the effects of fiscal policy to read it.

One result I found interesting is the apparent temporary depressing effect of an anticipated tax cut, consistent with the predictions of a standard dynamic general equilibrium model...
Our results appear consistent with strong supply side effects of tax changes. The strong decline in investment and the drop in hours worked in response to a pre-announced tax cut is consistent with the idea that future lower taxes motivate firms to delay purchases of capital goods and gives rise to intertemporal substitution of labor supply. Indeed, Mertens and Ravn (2011) show that a DSGE model can account quite precisely for the dynamics of output, investment, and hours worked that follow after unanticipated and anticipated changes in taxes...
The boom associated with an announced tax cut seems to begin only when the actual cut is implemented. Together, these two pieces of evidence make for an interesting interpretation of what caused (or at least contributed to) the early 1980s recession.
Anticipated tax liability changes were particularly relevant impulses to the business cycle during the early 1980’s recession, the expansion that followed thereafter, and during the early 2000’s. 
Particularly interesting is the 1980’s episode where we find that ERTA (Economic Recovery Tax Act) 1981 and the Social Security Amendments of 1977 together had a large impact on the U.S. economy. The Social Security Amendments of 1977 (signed by Carter in December 1977) included a 0.56 percent tax increase implemented in 1981. This tax liability change had an expansionary effect on the economy prior to its implementation but provided a negative stimulus once implemented in 1981.

ERTA 1981, signed by Reagan in August 1981, was associated with major tax cuts implemented gradually from 1982 to 1984. These anticipated tax cuts had a negative impact on the U.S. economy from late 1981 up till the end of 1983, the same time as the negative effects of the Social Security Amendments of 1977 were setting in. When the Reagan tax cuts were eventually implemented through 1982 to 1984, it provided a major stimulus to the economy during the mid 1980’s. Together, these anticipated tax cuts therefore stimulated the economy prior to 1981, gave rise to a contractionary effects from 1981 to late 1983, and helped the economy recover thereafter.
Of course, these tax shocks are not estimated to be the whole story. Evidently, they account for around 20-25 percent of the in-sample variance of (detrended) output which, as the authors point out, is an estimate that is at least as large as the contribution of other popular candidates for business cycle impulses. In short, something that should be taken seriously!


  1. I read the paper a few months ago, it's some very interesting stuff. Theoretically, the work is quite solid (they also have a more elaborate corresponding theory paper). Empirically, the paper is well done. The nice thing is that it's much easier to classify a tax shock as exogenous and structural, not to mention it's interpretation is clear. In a lot of papers I either doubt how exogenous or structural a shock really is (e.g. preference shocks and bond premium shocks I doubt are either exogenous or structural) or I find the shocks difficult to interpret as to what they really are (e.g. are these productivity shocks really productivity shocks or is this a stand in for some problem in financial intermediation?). I would have liked to see disaggregated taxes, like the response of labor vs. capital tax rates, rather than all of them just thrown together in one identifying assumption - but no paper is perfect. But anyway, 20-25% is a large effect and should definitely be taken serious.

    Obviously this paper has little to say about the current economic predicament, but a solid policy take-away is that if we are going to lower taxes, we shouldn't have a significant delay in implementation. Of course, some politicians could take away that promising to raise taxes in the future would be great for the current economy !

    1. In terms of the current situation, I wonder whether the implication might be as follows. Suppose that people are expecting some future increase in taxes. Then the recovery we have experienced since the end of the recession is really just the lull before the storm (of when the tax hikes are actually implemented). In short, this relatively anemic recovery is about as good as it gets; and, barring a fortuitous rise in productivity, things are about to get a lot worse. Pure speculation, of course. But an interesting possibility, nevertheless.

    2. Obviously this paper has little to say about the current economic predicament . . .


      You have forgotten that the Obama stimulus was greatly tax cuts, tax cuts which would have to be labeled "surprises," if there was anything to this paper, which there is not.

      So the current situation tells us that tax cuts have no value as a stimulus.

      Second, since the Lesser Depression started everyone has known that, at the end of the day there will have to be tax increases, for there is no free lunch. When you have to use taxes to pay off gov't guarantees on deposit insurance and housing agency bonds, you know there will be tax increases.

      Under the stupid, future taxes bring activity forward argument, this threat should have also been a stimulus.

      Guess what Ted, it wasn't, either. So what we have here is a paper proved useless by more recent experiences.

      David writes,

      "In short, this relatively anemic recovery is about as good as it gets; and, barring a fortuitous rise in productivity, things are about to get a lot worse. Pure speculation, of course. But an interesting possibility, nevertheless."

      Why do you call your comments "speculation." They seem to me pretty accurate and have nothing to do with this paper.

      BTW, in its infinite Wisdom, the USConst. named me anon., not my mother. You are a public official voluntarily making public comments. The only sensible response is anon.

    3. I don't think I made myself clear. What I meant to suggest was the possibility that the recovery we have seen in the U.S. since the end of the recession might have been in large part the byproduct of pulling future economic activity forward, in anticipation of a higher future tax burden.

    4. suppose you are right: its "mostly" fiscal policy driven right now (negative real rates until 2014 has nothing to do with altering peoples consumption/savings decisions pulling demand forward). Why does the Fed allow it to happen? Just raise rates right now and offset it, if they want, cant they?

    5. dwb,

      Why does the Fed allow *what* to happen? Expectations of a higher future tax burden? Negative real rates? I'm afraid I don't understand your question.

      Btw, I think it's important not to get carried away with this (or any other) idea. It may be one of many forces that are currently at work in the present environment.

    6. "Btw, I think it's important not to get carried away with this (or any other) idea. It may be one of many forces that are currently at work in the present environment."

      right: that was actually my point, it sounded like you were crediting the recovery "in large part" on expected tax policy not the Fed keeping real rates negative. poor controls for monetary policy is the basic problem i have here.

      Don't get me wrong, i have vast firsthand experience with cramming projects into a year-end to preserve their tax status. I am sure tax policy shocks play a supporting role. I just would not take that so far as to suggest that tax policy made a significant contribution to the 1981 recession (or any other). If it did make a contribution, it was not in the way the authors think: it was by raising the uncertainty in the forecasts.

    7. David, first, we are finally getting somewhere toward having a useful discussion, which I very much appreciate.

      You write, "I meant to suggest was the possibility that the recovery we have seen in the U.S. since the end of the recession might have been in large part the byproduct of pulling future economic activity forward, in anticipation of a higher future tax burden."

      First, let's get a non-issue out of the way. The gov't can create incentives that sometimes move economic activity forward (such as the cars for clunkers program).

      This brings your suggestion into its proper light: does the possibility of higher taxes later have even the possibility of bringing forward economic activity that will have a meaningful impact on real economic activity?

      Respectfully, I would submit it doesn't. First, there is no evidence such as Gallop polling or other surveys that show that this economic activity has happened. Understand that in my view sale of stocks or bonds or other evidences of ownership are not the bringing of economic activity forward, for they work no change in the productive capacity of the economy. Day-to-day, Exxon is not made more productive because its shares are traded on the Exchanges.

      You have already hi-lited the importance of productivity. Who has built a factory or made any other capital investment since 2008, now, so as to avoid future taxes? If this happened, it would be front page news on the NYTimes.

      IOW, respectfully, I would suggest that the idea that any economic activity of this sort even exists that can be brought forward is a urban myth.

      The lack of robustness in the recovery shows that this "phenomenon" does not take place.

      I believe my POV is supported by events since mid-2008. That POV is that the Lesser Depression was caused by the doubling of energy prices, with prices reaching their all time high in early July 2008.

      My point of view is that these high taxes had never been abated or reduced, but in fact have been kept high by numerous factors beyond Obama's control (Iran, spill in the Gulf, and a hostile Congress, controlled by the oil industry, etc.)

      Because of OPEC, etc., in effect, the price of oil is a tax and its effect is immediate. When Clinton left office in 2001, oil was $16.56 at barrel. It went to over $91.00 a barrel in mid-2008.

      The paper to which you refer makes no mention of these facts and in fact wholly fails to consider reality.

      Further, only the high price of oil starts to explain the "Stiglitz" problem, that the economy was in trouble well before 2007. I date our problems to at least the fall of 2001.

      In sum, we now have something worth discussing. What economic activity do you think has been brought forward? Why do you think that is the case?

    8. "That POV is that the Lesser Depression was caused by the doubling of energy prices, with prices reaching their all time high in early July 2008."

      Bernanke and Gertler would say that high oil prices cause recessions because an inflation-targeting fed inappropriately responds to import prices by tightening monetary policy.

      gasoline prices have gone up by a factor of 4 since 1988. so what?

    9. read the paper, but the gist is that higher gas prices killed the demand for housing (which demand, BTW, has not returned because prices remain so high)

    10. i read it, the argument amounts to: "we built a house of cards so we are going to blame the last card for knocking it down."

      Do you think the Fed should just target oil prices then?

      but seriously, high gas prices did not reduce the value of rentals. Do you need to drive a hummer to work? maybe get a smaller car? We were well into the housing recession for 18 months in mid-2008, housing starts had massively declined, but we were not seeing as much of an uptick in unemployment as people expected because construction workers were finding jobs in other industries, like building rental properties.

    11. dwb

      Housing was not our "house of cards."

      Our entire economy is a house of cards. We are entirely dependent on imports (mfg. from Asia and oil from several sources) for which we cannot pay, given that 85% of our jobs are local services.

      We cannot stop buying on credit, however, because of the political repercussions in China, India, and Europe.

      IOW we are to the World where Germany is to Greece.

      The only solution would be to inflate out, implicitly imposing losses on those who hold our bonds.

    12. if the economy is a house of cards, maybe i should be in the glue business?

      seriously: 70% of the trade deficit is oil. You do realize that companies like Caterpillar and GE export a substantial amount of capital goods, as does the Agriculture sector, right? maybe if we stop targeting oil prices then people will consume less of it. Over the last 3 years auto manufacturing has strengthened on the back of more fuel efficient cars. heck, maybe we will even become a refined petrol product exporter (oh wait, we already are). Heck, maybe we can use centuries of cheap shale gas supply to make diesel and fuel oil.

      hmm. i am thinking: the economy responds to the incentives we give it?

    13. dwb

      Going against the counsel of Mark Twain, I will respond ever so briefly.

      Looking at the substance of our economy, the Federal Government borrows trillions of dollars each year above what we take in in taxes. This money is disbursed as transfer payments, principally either as defense spending or medicare, medicaid, SS, or similar programs, to raise the standard of living of the recipients above their productive capacity.

      The recipients in turn buy trillions of imports from China and OPEC. We could not buy these imports, but for the credit. Our service economy does not generate enough productivity to afford these goods. Otherwise, we would be paying cash, not borrowing.

      As for Caterpillar and GE, within 10 to 15 years, if either company still exists, it will not have significant North American employment. GE exists now only because of defense contracts.

    14. Otherwise, we would be paying cash, not borrowing.

      So, if we use Fed Reserve zero-interest paper to buy Chinese goods, this is good. If we use Treasury zero-interest paper, this is bad? Maybe you meant something else by that statement?

    15. why dont we just import 2 oz of chinese platinum, stamp it with "Liberty" and "In God We Trust" and "2 Trillion dollars" and Fed Ex it back to them. less ink and trees killed.

    16. David,

      The distinction between Fed and Treasury borrowing is form, not substance.

      What matters is the Munger/Buffett observation that each year we have been mortgaging more of the farm to raise the standard of living of part of the country. I am repeating observation.

      The Federal Government borrowers more and transfers it to selected parties, who increase their standard of living by buying imports which otherwise we as a country could not afford.

      Stiglitz, and many others, have observed that our economy has been fundamentally broken since well before 2005 and he is right. And, what I am describing is why he is right.

      85% of our economy is now service. The vast majority of service work (and workers) is not productive enough to pay taxes to pay off this debt.

      This axiom is why the deficit matters.

      I realize the cost of the borrowing, now, is low (you say zero-interest)(and I am not opposed to current borrowing because we have been over the Zero Bound since 2008).

      If you want to track it down further, principally, the Red States, which do not pay Federal Taxes in proportion to Federal Receipts are beneficiaries of this "system," for they are our least productive states. KY gets back $1.65 +/-for every dollar it pays in taxes. That .65 is borrowed and flows back as cheap imports from China which are distributed in KY through Wal-Marts, etc.

      You hit the nail right on the head when you wrote that we need increases in productivity. We need massive increases in productivity, which can only be accomplished by mercantilist policies to protect and rebuild manufacturing.

      Someone is one here going on about gambling. Talk about an unproductive industry. How does one get a dealer to turn the cards faster in a Poker Tournament?

      I have been in a service business for almost 40 years, which has had almost zero productivity growth, even with all the computers, laptops, cell phones, etc. The only innovation we have had is electronic filing, which saves a little on postage and paper. Big innovation is impossible. A judge can try only one case at a time. The same is true for most surgeries.

      You are in a service business. I will assert that there has been no increase in the productivity of economists since Keynes. In fact, biology assures that you will be less productive next year than this year.

      If you want productivity, you have to make something. You talk about productivity but refuse to talk about what it would take to create the conditions for such to happen.

      In a way, we need to go back to the our economic policies in the 19th Century, post the Civil War.

      We need to close our borders to all imports, while opening our borders and accepting millions of emigrants from Europe to solve their unemployment problems. Go to any major American city. We have millions of square feet of abandoned buildings, which need millions of people to fill them up.

    17. productivity is not about "making something"

      Here's my assertion: There are no goods producing industries - all industries are service industries. In *some* of those service industries, the "service" is putting things together to make stuff.

      I am surrounded by stuff, i don't need more stuff, maybe "manufacturing" is declining because there are only so many sofas i can stuff in my house. We have 1 laptop per person in my house (including my children). Maybe we (collectively) just don't need more stuff!

      Maybe we should figure out what the Chinese want to buy from us.

    18. dwb

      you really are dull

      No real gains in are possible in jury trials, surgeries, hair cuts, restaurants or casinos. Why are new college grads making 20% less than college grads of 10 years ago. They are being forced into low productive work.

      The really really big lie, spread by every economist who supported globalization was that it freed people for more productive work.

      BS, where is the more productive work? It isn't there. And, it is only going to get worse, as robots invade more and more of manufacturing.

      We need to close the boarders to imports, while opening our borders to people. Bring the jobs home. And let people in so that we avoid the demographic problems which are killing Japan.

      China buys only until it can re-engineer. It has no long term plans to buy anything from the West but commodities. In 10 to 15 years Cummins will not have a mfg presence in the US.

      you may be part of the 1%, surrounded by stuff, but most Americans are not. Look at their net worth.

      but if you do have enough, then I am sure you won't object if we raise your taxes so that others may have something.

    19. i should be so lucky as to be in the 1%.

      dull, really? I am just not seeing the evidence. Show me the evidence, not assertions.

      who makes and designs those robots and the software to program them? the unemployment rate in engineering, math, science, etc. is tiny compared to other degrees. yes economics too.

      I agree with you on the immigration, and don't get me started on the tax code etc, it is the full employment act for CPAs and lawyers, and they like it that way. And personally i would decriminalize a lot of things.


      restaurants: no, i worked in a fine eating establishment for many years. the technology is vastly different today. they still use pots and pans its true, but communication and accounting has vastly improved.

      surgeries: again no, i can come up with lots of examples about how survival rates and techniques have vastly improved over time. How about that nifty laproscopic surgery. 30 years ago they had to take out your gall bladder or appendix with a big incision, no they send you home in a day or two or even as an outpatient.

      jury trials: so you think LexisNexis and other search/database technologies have not improved the productivity of lawyers?? how about all the advances in forensic science like DNA and fingerprint databases that reduce the need for an actual trial?

      think about this question: right now 3000 chinese will line up for a really crappy job because the alternative is worse. you would never see that in the US, because our standards of living are higher. what happens in 30 years when Chinese standards are much higher?

    20. btw you are not addressing the issue: isnt printing a truckload of Ben Bernanke Bills just like raising taxes on everyone in the 1% group (just asking, not suggesting this is a good plan)?

    21. ok, sorry 1 more: i think i am being too clever by half.

      fundamentally what i am saying is that the Fed cannot promise to hold down import prices (those are determined on world markets). yet it does promise that!

      The main way they hold down import prices like oil is by causing massive unemployment (that sure depresses demand for imports!). Thank god they hold down those import prices for us so us working people can afford imports.

      Seriously: The fed can only control domestic prices. The fundamental solution to what you are complaining about vis-a-vis the trade balance is to depreciate the dollar to where imports become expensive. The only way we will consume less oil and buy more fuel efficient cars and import less from China is if its more expensive.

    22. Everyone,

      Anonymous is actually John D, a borderline retard lawyer from the Midwest who thinks he deserves more stuff just because he wants it. And he particularly wants rich people to pay for his extra stuff. Ignore him.

    23. trying to get other people to pay for my stuff does not sound retarded at all. i dont want more necessarily, but maybe i could get someone to pay to replace some stuff with different stuff.

    24. so you think LexisNexis and other search/database technologies have not improved the productivity of lawyers??

      no, not significantly. In fact, for a great deal of research it takes longer.

      Broad searches return too much and narrow searches, nothing. There is no consistently in language. One judge will write, "tacit representation." A different judge will call the same facts "implied misrepresentation."

      What has helped a little is that Google has a lot of older books now on Google Books.Since older opinions are better reasoned and researched, and not twisted by ideology, they are more useful.

      You pull the book and read it, almost like in a library.

      Beyond that, as I said, you are pretty dull. Amazingly few criminal cases involve DNA or fingerprints.

      The criminal law practice is a serious of frictions, unchanged by technology. Clients lie. Prosecutors and police lie and hide evidence. Witnesses refuse to talk about what happened. And, judges act like Judge Judy, which is a really toxic environment. Courtrooms are poorly designed. Federal courts, for example, frequently will not permit cell phones and lap tops and have no internet service.

      You really have no idea what you are talking about.

    25. I have been thinking about this (actually my sister is a lawyer), first, you have a skewed perspective. Second, honestly, i dont want criminal justice to be very efficient. The criminal code is too large and we criminalize too many things. Unless your idea of justice is "Minority Report." I ban cell phones at meetings sometimes, too many distractions.

      Nothing in your argument has anything to do with economics or is really applicable to other service industries.

    26. i looked up on the BLS website pay scales for engineering degrees, not nearly as glum as you suggest. thank god for facts. you can make $100k as an engineer (yes i know we cannot all be above average).

      maybe we ought to keep those math scores up, Anonymous.

    27. Chernow's Hamilton confirms that, when Hamilton's plan to pay off the national debt was passed by the First Congress, and included raising taxes during a Depression. The immediate effect of the Plan was an economic boom because it signaled that we had a serious national government.

      No one ever talks about this, but Hamilton's point of view attacks the same problems that Keynes saw but in a different way. Government is the solution, to be sure, but it is strong government action, not weak government action.

      If one, for example, looks at "austerity," now in either GB or Europe, no one could argue that it is serious austerity, intended to make anyone fell safe or secure. It does not meet Hamilton's test of being sufficient to restore confidence.

      Isn't what we really need a signal to everyone, the Markets, the World, that we are a serious people again?

      Your thoughts?

      What would your models tell us would happen if we went to a Hamilton plan right now, raising taxes sufficient to pay off the national debt in 30 to 40 years? What if we took that step combined with elimination of income taxes, replacing such with a VAT, and a health care system like Switzerland or Germany that would lower health care cost, and its mis-allocations of resources, from 18% to 11% of GDP?

      Why wouldn't we get an immediate Hamiltonian boom?

  2. It's because the marginal tax rate remains unchanged despite earners getting higher disposable incomes.

  3. well, sort of: you can't really hold monetary policy constant, especially during 1980 and 1998 period when the Fed was actively trying to disinflate the economy (I pick 1998 because that's about the time inflation expectations based on the Philly Fed leveled out to about current levels). Volcker (and Greenspan) were trying to bring down inflation + inflation expectations. So did the FOMC *allow* the policy to have an impact in order to disinflate, did the FOMC tighten less than they might have? Also, there is model uncertainty regarding the impact, to the extent the Fed is actually trying to offset fiscal policy, maybe they consistently underestimated. All hard to say but you would have to go back to FOMC minutes and forecasts to understand the intent.

    1. "1980 *to* 1998 period."

    2. But, they did control for monetary policy in a pretty standard way (section 4.4.1) - or are you dissatisfied with their identifying assumptions? If the Federal Reserve is reacting contemporaneously to changes in fiscal policy, and fiscal policy has any relevant impact on the variables the Fed cares about, shouldn't this be captured by the innovations in the federal funds rate in their VAR? Obviously no empirical work in macroeconomics will ever be perfect, but what they have done seems pretty standard and well-established.

    3. The fed responds to what it expects to happen, not contemporaneous variables.

  4. This is not a paper to be taken seriously.

    Again,David, you get an F.

    We are well past the Obama tax cuts of 2009; if the paper were honest we would now be in a full blown tax cut driven boom.

    Moreover, the "paper" doesn't align at all with the facts regarding 1980/88. Between 83 and 86, the deficit was three times is size as in 1980, while at the same time federal spending doubled in 8 years.

  5. David, these are not "contributions," that I should have to make. You should thing through and test papers before you put them up.

    The Obama stimulus included massive tax cuts that, by definition of the writers of the paper, had to be a surprise. Nonetheless, here we are 2 1/2 years later and we are not seeing the "pop" their study "predicts," from the "shock."

    It is more than fair for me to say that recent events disproves their hypo, especially as they say nothing about the Obama tax cuts.

    Moreover, they say nothing about the massive increase in spending by RR, or the on-top deficits that parallel the "pop," they claim to find after using "estimates" to judge the effect of RR's Keynesian fiscal policies.

    I could go on and on is tearing the "paper" apart, but what is the point when the bigger issue is why was it ever given mention?

    Nor, does the paper explain why Clinton's tax increases worked or why the initial "shock" of the first federal income tax didn't send us back to the stone ages.

    IOW, the paper is TP paper.

    1. Your mother was wise to name you anonymous.

    2. John D, you're not fooling anyone.

    3. David,

      Today, Krugman correctly points out that both you and SW have been doing nothing but channeling Art Laffer.

      Enough time has now passed that Krugman is in full, "I told you so" mode.

      David, let me echo his remarks to you. I told you so.

      And, BTW:

      Let me add, for the 1.6 trillionth time, we are in a liquidity trap. And in such circumstances a rise in the monetary base does not lead to inflation.

      You have constantly and wrongly gone after Krugman.

      Lets put in it black/white: Are we in a liquidity trap?

      If not, why do you say, "Not?"

      And, if you don't answer we will take that as an admission that Krugman is right (and that you are wrong in every way about him).

    4. Anonymous,

      Why don't you read this, where I state my views of the Japanese economy in the early 2000s, and compare and contrast them with Krugman's. Then get back to me. (Oh, and try not to be too embarrassed, if that emotion is even possible for you.)

    5. David,

      I wholly fail to understand why you believe I would be embarrassed by your response.

      Of all the people you stop by here, I am quite confident that no one feels more strongly about productivity than do I. I like your paper. It makes a great deal of sense to me, given what I have read about Japan since 1990.

      I am very sure that my thoughts and feelings are stronger than yours, for I have real first hand knowledge and have been a keen observer for many years.

      As I have written more than once, never very well perhaps, I believe this is our fundamental problem, to the extent that I believe than an economy that is 85% plus services cannot sustain itself, for it cannot be productive enough.

      I have continually tried to say that Krugman (and Delong) are too one dimensional. Printing money, while it will not cause inflation, is not enough, not nearly enough to solve our problems. Keynes is so badly mistreated. Keynes would be the first person to say that the key, always, to the future, is productivity.

      That is a point in his famous quotation about you need the government to support the average business, to help it gain confidence, so that it can again be productive!!!

      Where you and SW are wrong, however, is to oppose Krugman, saying there is a threat of inflation.

      Krugman, I am sure, would fully support most any sane or reasonable effort to increase productivity.

      You seem to see this last question differently. Why?

      The enemy in all of this is the Taylor, Cochrane, Chicago School axis, with whom you and SW continue to align, forgetting that in times like these you are either with us or against us.

    6. John D, David may be entertaining your insanity for the moment, but he knows it's you. You may as well go home and play with the other cranks, we're not buying your crazy here.

  6. Where you and SW are wrong, however, is to oppose Krugman, saying there is a threat of inflation.

    Where have I said this? If anything, I keep on saying that as long as the world demand for USD and UST remains strong, inflation is not an immediate threat (although, I would always add too, that a central bank must always keep it's eye on inflation expectations).

    The enemy in all of this is the Taylor, Cochrane, Chicago School axis, with whom you and SW continue to align, forgetting that in times like these you are either with us or against us.

    I am for reasoned debate. I guess that makes you my enemy.

    1. David, your denials won't work. Repeatedly, you and SW have attacked Krugman. Attack him and you implicitly attack all his thoughts and ideas, making you the enemy by your choice. SW is constant in his Laffer line.

      David writes, "I am for reasoned debate."

      David, three comments.

      First, your attacks on Krugman haven't been reasoned. He is right and you are wrong.

      Second, you are alone and by yourself in wanting a reasoned debate. No one else is, especially the GOP adn Tea Party and they are not about to change. Taylor, Lucas, Cochrane, the Chicago/Freshwater axis is not about reasoned debate.

      Third, David, the reasoned debate horse has already left the barn. Do you think you can have reasoned debate with the GOP or Tea Party. Read Delong's recent posts.

      Maybe 50 years from now in China someone will care about reasoned debate in economics, but never more here in the good ole USA.

      Events are already so out of balance that reasoned debate will never happen, here, if it ever did, in your or my life time.

      Just a few more Congressmen or Senators this fall, for example, and we will no longer have a Fed. In fact, my bet is that the Tea Party/Ron Paul will demand elimination of the Fed as a price for any debt ceiling extension. If I were in their political position, that is what I would do.

      In sum, you are just so naive.

    2. Attack him and you implicitly attack all his thoughts and ideas, making you the enemy by your choice.

      a remarkably stupid thing to say. PK is sometimes right and sometimes wrong and reasonable people can disagree.

      Can we starts with some facts please not dull rhetoric? Is that how you win cases, without evidence? Could you at least bother to check some simple facts?

      Here are some facts:

      * We exported 2 Tn dollars in 2011 (which is offset by imports, a huge chunk of the difference being crude oil). We export stuff to china (mostly capital goods).

      *"service worker" productivity has increased 1987-2010 (see BLS statistics below). Even in "food service and drinking places" its gone up .7% per year.

      *The total value of manufacturing has gone *up* and is higher than 2006 in both real and nominal terms. The number of employees in manufacturing has gone down because productivity has gone up.

      trade balance report:

      (look at the breakdown of exports exhibit 6, did you realize we export about 35 Bn dollars of auto equipment??)

      exports to china going up:

      value of manufacturing (real and nominal):

      productivity 1987-2010:

    3. incidentally, "Anonymous," if you have not read the PK article in the FT heres a link:

      I agree with the part where he says (some other parts as well):

      " So what, I wonder, would he do if he were put in charge? He says he would add maybe another $2tn to the Fed’s balance sheet, by purchasing a wider range of assets, including more private sector liabilities. “But mostly”, he continues, “you work on the expectations side. I think mostly what you really need to do is to signal that you’re going to keep your foot on the gas pedal.”

      It does not even matter, he believes, if people are not sure the Fed will carry through. They just have to believe it might happen. “So if Ben Bernanke made a statement, or the board made a statement, saying that we are reconsidering our views about the inflation target, even if we don’t have a credible commitment that they’re going to deliver 3.7 per cent annual inflation over five years, that’s still a help.”

      I agree with some other parts as well. It might sound like a technical difference, but the part where i would disagree with PK is that inflation expectations are not the expectations that we need to set (expectations for nominal income are better).

      my point is that just because reasonable disagree with PK on some issues, does not mean that those same people cannot agree with PK on other issues.

    4. dwb...anonymous above is a troll; please ignore him. And thanks, by the way, for your excellent contributions!

  7. thanks, although its hard to let go of the"ser ice economy is unproductive we dont make stuff in the US" rhetoric, i find it irritatingly ill-informed especially when i dont even have to remember where i read stuff anymore i can just google service sector productivity. how do we measure the productivity contribution of google and FRED to the service economy btw? lol.

  8. Sovereign Bond Yields Falling All Over The Place: Here's The REAL Story Of What's Happening To Government Bond Markets Around The World: Yields are shooting higher in Spain and Italy this morning, but actually that obscures the truth about what's going on in the government bond department. The fact of the matter is that yields are plunging left and right.

    The yield on the US 10-year bond has just fallen below 1.7%. UPDATE: the yield has just hit 1.6713%, a brand new record low.
    In Germany, the 10-year has fallen to a new record of 1.33%.
    UK borrowing costs have hit a record low of 1.73%.
    In Finland, the yield on the 10-year is 1.624%. You guessed it, that's a record low.
    Sweden: The 10-year yields 1.405%. Same deal.
    In Australia, the 10-year has dropped close to a record low of 3.061%.
    Canadian 10-year yields at 1.87% are close to a record low.
    Japan's 10-year: 0.85%.
    Swiss 10-year: 0.59%.

    Get the point?

    All around the world, people are clamoring for the safety of government debt...

    David, what's the message?

    1. That no one trusts the government to keep its hands off private sector income and wealth through higher future taxes. Since higher future taxes support the value of government bonds, this is what people flock to.

      Got it?

    2. So, when the US cuts taxes, interest rates go up, since people doubt that the government will pay off its debts.

      Glad we finally got rid of Laffer

      That is what Robert H. Dugger calls Fiscal Adjustment Cost discounting (Bob gets out over his skis, sometimes, but he does a good job explaining his reasoning on this point).

      Seems like you just signed on to what we should call the Hamilton Plan II, for which I advocated above, that Obama should go for:

      A real plan, over 30 to 40 years, to raise taxes to pay off the Federal Debt, which will keep rates low and permit private investment to start to borrow, now.

      What further messages do you see in capital not being willing to buy stocks, even those that offer yields above 1.6713%?

    3. So, when the US cuts taxes, interest rates go up, since people doubt that the government will pay off its debts.

      Glad we finally got rid of Laffer

      Where is Burr when you need him?

      Cutting taxes whilst maintaining program spending in place invites default (unless there is a large foreign appetite for Treasuries, in which case, the added debt can be rolled over indefinitely at almost zero carrying cost).

      Default would cause interest rates on Treasuries to go up, for sure. But interest rates on corporates may actually decline. Can you figure out why?

    4. Laffer maintains that we may increase spending because of dynamic scoring, as tax receipts rise, always, when you cut taxes.

      Again, have we got agreement on Laffer or not?

      The lower bond rates would be Chinese corporations. :<)

      Can you figure out why?

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  10. The boom associated with an announced tax cut seems to begin only when the actual cut is implemented. Together, these two pieces of evidence make for an interesting interpretation of what caused (or at least contributed to) the early 1980s recession. buy from china