Arnold Kling  

Morning Commentary (Feeling Angry)

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Three things to be angry about this morning.

1. The Obama Administration's plans to save banks. I outsource my comments to Yves Smith. Thanks to Mark Thoma for the pointer.

2. Alan Blinder and David Leonhardt confusing stimulus with class warfare. They say that we need to get money into the hands of the consumers who are most desperate to spend it. Their folk Marxism blinds them to the fact that the key to recovery is actually business profits, which are in much worse shape than consumers. Blinder argues against business tax cuts, as if businesses don't spend.

3. Since when is Mark Zandi a stimulus expert? Oh, I know why he got the label. First, he is giving answers that the Democrats want to hear. Second, he is giving precise numbers, like multipliers of 1.73. But any competent economist would be responding to people who ask for estimates of multipliers by saying, "I don't know, but I think the right ballpark is..." or "These are just guesses."

There is no such thing as a "stimulus expert." I hereby throw my shoe at Mark Zandi.


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COMMENTS (16 to date)
CK writes:

Arnold Kling is a prophet for our age.

He is the new Tanta.

That is all.

max writes:

I don't normally comment - but that is SOLID!

Arnold is a hero for our troubled age.

gnat writes:

If the problem is lack of aggregate demand by households why do you reccommend decreasing business taxes?

JR writes:

gnat:

The incidence of all business taxes fall on households.

dearieme writes:

Let me lend you a clog.

gnat writes:

JR
The incidence of business taxes depends of supply demand elasticies. It is not clear at all that households and firms are price elastic right now. or that fir

El Presidente writes:

gnat,

If the problem is lack of aggregate demand by households why do you reccommend decreasing business taxes?

So nobody can call him a folk-Marxist. Name-calling is hurtful.

Arnold,

Their folk Marxism blinds them to the fact that the key to recovery is actually business profits, which are in much worse shape than consumers.

In % losses perhaps, but they have further to fall. Consumers can't get much lower since they've already sold the linon's share fo their income for present consumption. Recovery for whom? Where do those profits come from? You seem to think that we should take money from poor people and give it to rich people if that will sustain their "profits". I don't understand how that makes any sense. You didn't advocate social profit-sharing on the upswing, did you? Furthermore, profits are EARNED. If they do not come through the normal course of business in exchange for goods and services they are not profits. They are windfalls, subsidies, special treatment, tribute, something else entirely. I would think that a libertarian would want to first do no harm, but you seem to apply that principal only to capital and proportionally to those who own it. And you want to engage in name-calling?

On this blog you have twice proposed and now eluded to an awfully interventionist strategy for the primary benefit of those who already have plenty. You should know full well that we cannot sustain business profits indefinitely by means of government support and you have not suggested how you think the market can regain steam and move forward under its own power except perhaps by some magical twist of fate. How does that comport with libertarian principles? Poor people have been losing ground for decades, and what would you suggest we do for them? I suspect your answer is "nothing" or some variation on the rising tide theme, which itself has so many holes it can't even float.

Former President Bush 43 suggested that Wall Street got a little drunk and would need to suffer through the hangover and sober up. I propose a different analogy. I say they got drunk then knocked up their high school girlfriend on prom night and she is about to have their child. They're now bound to care for it, at least financially, until it reaches maturity. Actions have consequences. Taking a short-run approach that won't even work is like trying to figure out how to evade child-support and cast doubt on their paternity by disparaging the woman's character. It's irresponsible, it's irrational, it's fairly immature. I wish we would all grow up a little.

JR,

The incidence of all business taxes fall on households.

Great. Which ones, and how much? If you wanna talk equitable taxation, that's a discussion worth having.

George writes:

El P. wrote:

"You seem to think that we should take money from poor people and give it to rich people if that will sustain their 'profits'."

The only way the government takes money directly from poor people is via payroll taxes and sales taxes. Currently we explicitly give poor people money through the Earned Income Tax Credit.

Arthur_500 writes:

"the key to recovery is actually business profits, which are in much worse shape shape than consumers. Blinder argues against business tax cuts, as if businesses don't spend."


Actually, the problem with business tax credits is that most are only good if profits exist. They don't create jobs. OK so much of the stimulus idea doesn't create jobs but I digress.

Keynes would have argued that the programs must be targeted to putting people to work so they can spend their money which would return businesses to profitability. He also would have claimed this is a one time shot that would go away when it completed kick-starting the economy. Regretfully the new interest in his theory only listens to the idea of spending.

Mike Moore writes:

Why do you people insist upon straw-manning Arnold's argument? A few examples:

Arthur_500:
"Actually, the problem with business tax credits is that most are only good if profits exist."

Tax credits and tax cuts are two different things. To my knowledge, Arnold has called for the elimination of the employer side of the payroll tax to reduce the cost of hiring new employees.

El_P:
"You seem to think that we should take money from poor people and give it to rich people if that will sustain their "profits". I don't understand how that makes any sense."

Incorrect, it is plausible to cut taxes on the rich and the poor and reduce the role of government in the economy at the same time. Your example is actually pretty explicitly what Arnold is NOT arguing for.

"On this blog you have twice proposed and now eluded to an awfully interventionist strategy for the primary benefit of those who already have plenty."

Building up your straw man. Arnold was against the bailout from the beginning. Go back and read the posts if you don't believe me.

"Taking a short-run approach that won't even work is like trying to figure out how to evade child-support and cast doubt on their paternity by disparaging the woman's character. It's irresponsible, it's irrational, it's fairly immature. I wish we would all grow up a little."

This analogy seems to fit better for the stimulus than for any tax cuts in corporate taxes or payroll taxes or what have you.

Gnat:
"If the problem is lack of aggregate demand by households why do you reccommend decreasing business taxes?"

The problem right now isn't a lack of aggregate demand, it's the freezing of the credit markets (zombie banks), the lack of business investment, and the precipitous drop in profits. That would probably be why he calls for decreasing business taxes.

Troy Camplin writes:

A business tax cut is a price cut that doesn't negatively affect the economy. We should be in favor of massive business tax cuts -- perhaps a moratorium on business and sales taxes for 6 months or so.

El Presidente writes:

Correction: I meant to write "alluded", not "eluded". My apologies.

George,

The only way the government takes money directly from poor people is via payroll taxes and sales taxes. Currently we explicitly give poor people money through the Earned Income Tax Credit.

I disagree with your first point and agree with your second. However, I was making a point about values and priorities, not current government policy. It seems I did not make that clear.

Mike Moore,

It is plausible to cut taxes on the rich and the poor and reduce the role of government in the economy at the same time.

It certainly is. It isn't what I would do, nor is it what Arnold has suggested we do. He advocated a cut in the employer's contribution to payroll taxes as a means of stimulating profits. He said it was a temporary strategy aimed at stimulating investment, not a permanent rate reduction. He didn't say that government spending should be reduced to pay for his proposed tax cut, nor did he say what spending should be eliminated. We would be doing this with deficits which must be repaid in one way or another. It's not a straw man, just strict accounting.

The concept of "temporary" is what sticks in my craw. I don't believe it is politically viable nor do I think it takes sober assessment of the balance of power in our country. Unless Arnold is saying we should RAISE the employer's contribution at a later date in order to pay for the debt (nearl impossible), he is arguing with respect to the status quo that businesses (i.e. the households who own them) must get something for nothing, which leaves the rest of us to pay for it directly or indirectly. Look at the "temporary" tax cuts that have yet to "expire". Telling businesses they can have a little more now but they will have to pay for it later would counteract the supposed immediate positive effects of the reduction. It buys them time, and that's all. Time to wait for what? Magic? Are they going to increase output and sustain employment for that? If they do not profit from employment and production, they will not pursue employment and production. You have to make them earn it and there has to be somebody from whom they may earn it.

If you are suggesting that there may be efficiency gains from reduced taxation that will increase output and thus allow us to repay the debt more easily, I want evidence. Some boats are tied to the dock and do not rise no matter how high the tide goes. They take on water and sink. How do you think so many Americans end up in prison? Reagan didn't rush to raise marginal rates in order to pay for his defense spending. There was no way he was going to expend his political capital being responsible. What makes you think it would be any different this time?

If you would like to read a fantastic explanation of the trends which have brought us to this point and continue to make our economy melt down, see the testimony of Chmn. Eccles before the Senate Finance Committe, February 13 to 28, 1933. He lays out nicely the connection between distribution of wealth and income, the velocity of money, the volume of exchange, profitability, and employment. Our hardship originated with inefficient distribution, often by fraudulent means, as did the hardship of his era. We may choose to solve it differently, but we should be informed about its causes before we propose solutions that will make the problem worse. Arnold's suggestion targets the wrong point in the system to affect sustainable change throughout.

Mark Zandi writes:

Actually, I have gotten a new batch of numbers and a couple more servers, and have now revised the multiplier by 1.74.

***ducks***

Eric writes:

The problem right now isn't a lack of aggregate demand, it's the freezing of the credit markets (zombie banks), the lack of business investment, and the precipitous drop in profits

Are the credit markets really frozen?

http://www.mises.org/story/3288

Note the graph.

Jacob Oost writes:

Left-wing economists like Blinder (or Krugman, etc.) confuse me. They say one thing in a textbook or academic paper, but when discussing their favored policy in an op-ed, they say another. Blinder's textbook gives as good an understand of basic econ 101 as any, explaining how unions raise prices and increase inefficiency, how minimum wages raise unemployment, etc.

Is it that they just don't care if something makes bad economics, so long as it's well-intentioned?

Eric writes:

The problem right now isn't a lack of aggregate demand, it's the freezing of the credit markets (zombie banks), the lack of business investment, and the precipitous drop in profits

Are the credit markets really frozen?

http://www.mises.org/story/3288

Note the graph.

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