Arnold Kling  

Morning Reading and Reactions

What I'm Reading... Best Comment Thread Ever...

We'll start with good news, and move down. Greg Mankiw (among others) links to a profile of Robert Barro.

The main result of Barro's other hit paper on economic growth—a 1992 article in the Journal of Political Economy, coauthored with Xavier Sala-i-Martin—has stood the test of time so well, in fact, that his Harvard colleague Larry Summers has dubbed it the "iron law of convergence." As with Barro's 1991 article, the idea was simple and involved bringing in new data: the trick this time was to use data for regions within a country...

[this] offered a cleaner way to focus on one particular question: do regions that are initially poor catch up with richer regions? For the U.S. states, the answer was yes. In the aftermath of the American Civil War, the southern states were generally poorer than other states. But Barro and Sala-i-Martin showed that, in the one hundred or so years following 1880, the states that were initially poor grew faster. There was catch-up, or—in the jargon of economists—"convergence." The rate at which the poor states caught up to the rich was not particularly fast though, only about 2–3 percent a year.

I am ashamed to see that until today I was not familiar with this paper or the result.

Later in the profile:

Barro argues, however, that rare disasters, such the Great Depression or 9/11, even though they are low-probability events, can keep investor demand for safe assets such as government bonds high relative to that for stocks.

Keep that in mind when you read Yves Smith.

DeLong and others treat the problem as liquidity, when the liquidity problems reflect concerns that Nouriel Roubini has discussed before, ones of insolvency and uncertainty. Lowering interest rates 50, or even 200 basis points is not going to make anyone any more willing to buy asset backed commercial paper. What might make them more willing is knowing if that particular counterparties have good collateral.

I think of it as a rise in the risk premium. The Wall Street Journal gives an example--the London Interbank Borrowing Rate (LIBOR) has shot up relative to comparable interest rates.

Also in the Journal, Clark Havighurst and Barak Richman argue, as I have in the past, that passage of the Bush tax reform proposal for health insurance is a necessary prelude to any major health policy reform.

A good way to prepare the public for needed health reforms would be to expose consumers to the true cost of health insurance. President George W. Bush's pending proposal to tax the value of employees' health benefits as income, while also providing a compensating standard deduction or tax credit, would serve the useful purpose of stimulating market and political demand for low-cost alternatives, including coverage that stops short of paying for everything seemingly mandated by professional (that is, non-economic) standards.

Congress is making a mistake in ignoring the president's proposal. If voters realized that it is not only the uninsured whom the current system victimizes, would-be reformers of all stripes might finally find a broad constituency willing to support fundamental change.

Finally, from The New York Times.

[Billionaire William] Gross said he did not think the public benefits from philanthropy were commensurate with the tax breaks that givers receive. “I don’t think we’re getting the bang for the buck for gifts to build football stadiums and concert halls, with all due respect to Carnegie Hall and other institutions,” he said. “I don’t think the public would vote for spending tax dollars on those things.”

Does he think that the public would vote for spending tax dollars on the things that Congress spends money on?

As a Civil Societarian, I would view eliminating the charitable deduction as an attempt by government to stifle all of the competing voluntary institutions. Seriously, I see any attempt to curtail the charitable tax deduction as something that would make me go the barricades and join a revolution. I would view choking off private charity as a major step toward totalitarianism.

Comments and Sharing

CATEGORIES: Political Economy

COMMENTS (14 to date)
Rue Des Quatre Vents writes:

Professor Kling,

I enjoyed your panoramic view of the morning news. If it did not take long, I wish you would undertake such tasks more frequently.

Also, I've started a civil societarian wiki. Please edit.

Matt writes:

Ditto, good work

nicole writes:

I'm so glad you included that awful NYTimes article in your post. It was one of those ones that made me so angry I had to write a letter to the editor immediately upon reading it. The charitable deduction "costs" the government such-and-such amount...please! And as if these people aren't already supporting schools and welfare and Medicare with the huge overall proportion of taxes they pay!

jpe writes:

FWIW, I'm broadly sympathetic to the perspective evinced in the Times. I work with not-for-profits, and many has been the time that I've wondered how in the hell a given organization got to be exempt.

Given that, I'd support a Canadian or English model, wherein there are two tiers: the first tier (the charities) would continue as they are now, while the second tier (not-for-profits: higher education [although there could be segregated scholarship funds that would qualify as charities], dance studios, academic-ish journals, think tanks, etal) would not be taxed but wouldn't be entitled to deductible donations.

Rue Des Quatre Vents writes:

Josh writes:

I would take the charitable donation exemption one step further - instead of it being a reduction in your *income*, make it a reduction in your *tax*. Put some floor under it to account for the things you can't do with private charity (e.g. roads, the military), and then for each dollar above that floor, let people decide if they want to give it to the government for charity work, or give it instead to a private sector charity. If people don't value the charity performed by the government more than charity performed by a private organization, we shouldn't force them to pay for it.

Of course, we could just not force people to give to charity at all, but that won't go over well with large segments (i.e. 100%) of the left.

TGGP writes:

Frequent commenter on other econblogs Robert D. Feinman advocates abolishing philanthropy, which at first I thought a completely fringe view (not that there's anything wrong with that!) until I heard about this NYT piece.

Brad Hutchings writes:

Maybe it was part of your point, but isn't the LIBOR a very commonly used index for adjustable rate mortgages, including many that fall in the subprime category? Could modest problems in the subprime loan sector be putting a premium on the LIBOR, thus exacerbating those problems?

GeneralSpecific writes:

The tax system should not be tied into nor complicated by philanthropy. When the founders of the country gathered at the constitutional convention, a primary objective was the power of the purse, to ensure that the central government was funded.

The government, elected by the people, should decide what issues are to be attacked by the representative government, whether at the local, state, or federal level. All other problems should be addressed by the private sector at the whim of those who decide to attack them, not based upon tax decisions. The tax system should not be distorted by their decisions. Ditto for the home mortgage deduction. Another distortion.

Arnold Kling writes:

Brad, if no European banks were exposed in any way to our mortgage market, then there would be no reason for LIBOR to go up just because of loans that are indexed to it.

Just as an aside, a rise in LIBOR is likely to really mess up some hedge funds. They often make trades based on LIBOR.

GeneralSpecific writes:

One other point: The charitable deduction is no different than the absurd tax benefits bestowed upon that non-energy source corn-based ethanol. I'm all for the state helping to solve problems when appropriate (and progressive taxes to take into account the benefits those at the top receive from the society at large). But rhetoric about manning the barricades and totalitarianism in response to ridding the tax system of distortions like the charitable deduction (and the mortgage deduction) is very similar to rioting farmers in support of ethanol subsidies.

Government should not be in the business of tax subsidies for business as usual matters, particularly something as nebulous and unmeasurable as "charitable deductions."

Stephen W. Stanton writes:

1. The charitable deduction is subject to a lot of abuse. Many foundations spend over half of their budgets on "fundraising", aka lavish cocktail parties for rich folks. Moreover, tax-free endowments in the tens of billions compete with taxpayers for investments... Schools and churches of dubious quality sit on under-utilized land worth tens of millions of dollars worth of land each, with no property tax to impose discipline on efficient usage.

1.b. Charities are offten horribly inefficient. (e.g., Donate a $1000 car for a receipt to claim a $5000 deduction worth $1500.)

2. The Libertarian in me understands your argument for competition by the private/charitable sector... However, I object more strongly to the idea of giving a huge break to a scientology church or christian science center while harassing local families and businesses with huge tax bills.

In conclusion, optimal taxing and spending policy would not allow charitable deductions. To some extent, we may provide vouchers for private sector delivery of "essential" services (e.g., elementary education).

btw - I suspect you may not have participated in some of the more absurdly lavish and inefficient charitable events that make the high society pages in NYC.

Rick Stewart writes:

Are there really people who will give away $1000 for the sole purpose of saving $500 (or less)in taxes? Please send me their names.

The illusion of the charitable contribution is that somehow or another the government doesn't get the money. Baloney - they get the money, but from somebody else. So the best way to prey on your neighbor is to ... give your money away!?!

Bill Clinton on NPR today was pumping his new book, something about giving. The NPR person actually asked him something like, "So, you make it sound like, if everybody gave away money, the government wouldn't have to step in?" [Not an accurate quote, but in the ballpark.]

Bill almost choked, and of course denied this is what he was saying. In fact, of course, it is precisely what he was saying.

Do the logic. If you believe the government should provide post Katrina aid, for example, then you must logically believe no one should provide any private post Katrina aid (they should instead give their money to the government, and force the government to tax the stingy bastards who won't cough up on their own).

Eliminate the graduated income tax, and eliminate the deductions, including charitable deductions.

Rick Stewart writes:

The 'abolishing philanthropy' link TGGP provides (above) is ... classic.

Mr. Feinman views it as unjust that I should get to decide how to give my money away, and suggests the government would do a better job of it. I suspect he is not so enamored with majority rule when it comes to ... the war in Iraq?

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