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Article Artículo

Explaining the Evils of Debt and Deficits, One More Time

Andrew Ross Sorkin had a good piece mocking the Peter Peterson funded Fix the Debt campaign since many of its CEO leaders are now gladly on the tax cut bandwagon. Unfortunately, the piece ends with sermonizing on the need to reduce deficits and debt.

"In the end, Mr. Peterson is right. The country — and businesses — will ultimately do better if the nation’s balance sheet is not bloated with debt. Part of the issue is generating enough revenue from taxes, and part is dealing with costs like health care and entitlements, which the tax overhaul plan does not even begin to tackle."

There are two ways in which deficits and debt can do actual damage to the economy. The first is the classic crowding out story. This is one in which government spending is pulling away resources from the rest of the economy. It has a lasting impact insofar as this leads to higher interest rates, which in turn reduce investment. The reduction in investment means the capital stock is smaller than it would otherwise be, which means that workers will be less productive. That means less future output and lower take-home pay.

CEPR / November 21, 2017

Article Artículo

Robert Samuelson Gets Trade All Wrong in Going After Trump

Robert Samuelson comes in behind Donald Trump when it comes to mastering the logic of international trade. In his column telling readers that "Trump gets the trade problem all wrong," Samuelson gets three really big things about trade wrong:

1) The dollar's status as the major global currency is not a major factor in the trade deficit;

2) In contrast to Samuelson's trade agenda, most workers have no reason to want the U.S. government to devote greater efforts to enforcing patent and copyright protection elsewhere; and

3) The Trans-Pacific Partnership (TPP) was not about free trade; in fact, it can with more legitimacy be called a protectionist pact.

On the first point, the dollar has long been the major global currency. That did not lead the United States to run trade deficits in the 1950s and 1960s. In fact, through most of the next three decades, it ran considerably smaller deficits than it is running now.

The reason the U.S. is running such large trade deficits was the decision by many developing countries to accumulate huge amounts of reserves following the botched bailout from the East Asian financial crisis in 1997. This was a serious failure of the international financial system, managed by the United States. (That would be Clinton, Rubin, and Summers if we want to name names.)

CEPR / November 20, 2017

Article Artículo

Do We Really Have to Hear from Peter Peterson's Crew About the Budget?

There may be no other person who has done as much harm to the world in this century as Peter Peterson, the Wall Street billionaire. Peterson has used his money to promote his complaints about excessive budget deficits. Due to his ability to fund a wide range of organizations, he has helped to keep these concerns at the center of public debate.

Back in the last decade, when some of us were trying to raise the alarm about the housing bubble and the economic damage that would be caused by its collapse, Peterson's crew were keeping the budget deficit front and center. News outlets like the Washington Post, New York Times, and National Public Radio had any number of news stories and columns raising concerns about the budget deficit. There was virtually nothing discussing the housing bubble and the risks it posed.

After the bubble burst and the economy desperately needed stimulus in the form of larger budget deficits, the Peterson organizations were still pressing their concern about exploding deficits. At a time when millions of people were needlessly unemployed, and millions more underemployed, Peterson's crew pressed the case for reducing the deficit. They were so successful they got the Obama administration to appoint the Bowles–Simpson commission on the deficit just as the recession was hitting its trough in terms of unemployment. This deficit fanaticism probably had an even more negative impact in Europe where the European Union and the European Central Bank imposed austerity on the countries of southern Europe that have led to downturns comparable to the Great Depression (much worse in the case of Greece).

CEPR / November 19, 2017

Article Artículo

CEOs and the One Percent

After having a horde of angry doctors attack me (and my wife) for suggesting that they face market competition, I was happy to see Jonathan Rothwell make the same point in a NYT Upshot piece. However, when running through the causes of runaway income at the top, he gives short shrift to the excessive pay of CEOs and other top executives.

Rothwell comments:

"Most top earners in the United States are neither executives nor even managers. People in those occupations make up just over one-third of all top earners in the United States. This share has been falling — particularly for corporate executives — and is lower than in many other advanced countries. In Denmark, Canada and Finland, close to half of top earners are in managerial occupations, according to my analysis of data from the Luxembourg Income Study."

Well, one-third is a very large percentage of top earners, more than the share of doctors, lawyers, and other highly paid professionals taken together. Also, even if the share of top executives in the one percent fell somewhat, the percent of income going to CEOs soared as the share of income going to the one percent doubled.

Also, CEOs are far more likely to be in the upper reaches of the one percent. Many CEOs are earning paychecks in the tens of millions. Very few doctors or lawyers pocket much over one or two million. 

CEPR / November 17, 2017

Article Artículo

The Republican Tax Bill and Cuts to Social Security

Reductions in Social Security benefits are extremely unpopular across the political spectrum. The program enjoys enormous support among both Democrats and Republicans and people are far more likely to say that benefits should be raised than cut. For this reason, the public should be paying attention to a little noticed provision in the tax bill passed by the House today and which also appears in the bills under consideration in the Senate.

In both cases, the basis for indexing tax brackets would be shifted from Consumer Price Index (CPI) to the Chained Consumer Price Index (CCPI). The difference is that the CCPI takes account of when people change their consumption patterns in response to changes in relative prices.

The classic example is that beef rises in price and chicken falls, we would expect people to consume less beef and more chicken. The CPI assumes that people don't change their consumption patterns while the CCPI adjusts its basket to assign less importance to beef and greater importance to chicken.

For this reason, the CCPI shows a somewhat lower rate of inflation than the CPI. Typically the gap is 0.2–0.3 percentage points. This matters in the tax bill because the cutoff for the tax brackets is adjusted each year by the CPI. If the CCPI is used rather than CPI, then the cutoffs would rise less rapidly.

For example, if the cutoff for the 25 percent bracket is $40,000 for a single individual and the CPI showed 2.0 percent inflation, then it would rise to $40,800 for the next year. This means a single person would face a tax rate of 25 percent on income above $40,800. If the CCPI showed an inflation rate of 1.7 percent, then the cutoff would rise to $40,680. This means a single person would face a tax rate of 25 percent on income above $40,680.

In a single year, this difference will not mean much, but after 10 years, the difference in the indexes would be between 2.0–3.0 percent and it would grow more through time. This will add a fair bit to many people's tax bills.

CEPR / November 16, 2017