Arnold Kling  

The Political Scene

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WHINE... With All Due Respect...

1. I was on a panel at the American Action Network today. My talk got a lot of laughs. At some point, there may be C-span video, but they might not have covered the panels.* There were a number of center-right Republican politicians there. Some of what they were laughing at were my suggestions to cut pay for state and local government workers and for getting rid of the mortgage interest deduction and the corporate income tax. For their part, they said some things about energy independence and such that made me bite my tongue. My personna on the panel was "cheerful extremist," which contrasts with the times when my blog posts are more on the "bitter extremist" end of things.

In keeping with the cheerful mode, I will say that the audience was very warm and that there are plenty of ways in which my views overlap with those of the center-righters. But if you think of this as my audition to be a policy wonk, I wouldn't hold my breath waiting for callbacks.

*If the video does turn up, I would plan to fast-forward through the speech by the Virginia governor. He could have used better focus, in my opinion.

2. Ross Douthat has a really important post on the Republican resurgence. He cites an analysis suggesting that the big political swing in Republicans' favor the past year has not been in the youth vote (which is typically most volatile) but among senior citizens. Experts are predicting a Republican victory in the House this fall, in which case I will lose the Worst Bet I Ever Made (I'm hoping Bryan will forget, so keep this on the down-low). But if the one-party state gets deferred because seniors are in rebellion over Medicare, I will feel shafted. Republicans winning by becoming Medicare demagogues is even worse than a one-party state.

3. A Canadian pol comes to the U.S. for an operation, and when questioned, offers this priceless response:


It's my health, it's my choice.

4. The health care piece that Nick and I wrote got picked up by a real newspaper.


Comments and Sharing





COMMENTS (19 to date)
richard writes:

I liked your column but wished you hadn't said anything about the unconstitutionality of a mandate. Don't you think that if in fact it were unconstitutional that a court would have made such a pronouncement to that affect with regards to the Massachussets Health Care mandate or any of the states insurance mandates? It just seems like an unnecessary distraction from your argument which is otherwise sound (and welcome in its novelty).

Bob Montgomery writes:

Don't you think that if in fact it were unconstitutional that a court would have made such a pronouncement to that affect with regards to the Massachussets Health Care mandate or any of the states insurance mandates?

The Constitution, generally speaking, applies to the federal government, not the state governments. States can do all kinds of things that the feds can't do.

David writes:

I'd be laughing at you too if I had seen you propose eliminating the mortgage interest deduction, because it's a terrible idea.

Dan Weber writes:

big political swing in Republicans' favor the past year has not been in the youth vote ... but among senior citizens.

So, pandering on the fear of death panels paid off?

I weep for the future.

Les Cargill writes:

David : The Mortgage Interest Deduction is a subsidy. Subsidies are generally considered bad, at least on EconLog...

David writes:

Les: no it isn't. Taxation of all interest should be considered bad, on EconLog and elsewhere.

Dan Weber writes:

The argument seems to be that because all interest used to be tax-deductible, it's not a subsidy.

Which is silly, of course. It reminds me of a co-worker who refused to sell a mountain of stock he had because it had gone down so much, and he wasn't really losing money if he didn't sell. But the history of it having been worth a lot in the past has no relation to the wisdom of keeping it now.

If it looks like a duck and quacks like a duck, it's a duck. And this quacking subsidy doesn't even encourage home-ownership, since the market just adapts around it.

David writes:

What's silly is your equating just one part of my argument to the completely unrelated concept of sunk costs.

When do the exclusions of a tax become a subsidy? If we exempt groceries from sales tax, is that a subsidy? For who? Producers or consumers? You might answer "both." (Is it a "bad" subsidy? For who?)

Now say we create a new tax on yachts. Do we say that every other good enjoys a subsidy at the expense of yachts? Either it's techincally true, in which case every tax creates a corresponding subsidy (and subsidies are "bad," remember?) Or it's absurd, and the line where some tax policy becomes a subsidy or not depends on where you choose to draw it.

Steve writes:

David:

Here's another part of your argument that is shaky: you claim it to be unfair that a wealthy person who pays for a $500,000 house in cash has paid taxes on $500,000 whereas a middle class person who borrows 80% of that value pays taxes on $963,000. You ignore the time value of money. By discounting at whatever mortgage interest rate you used to come up with $963,000, the two payment streams have equivalent present values (when you gross them both up for tax, they will still be equal assuming equal marginal tax rates).

David writes:

Steve,

You're right, both in that if you discount at the mortgage rate the present value of the taxes are the same, and that the discount rate shouldn't be zero (i.e. I shouldn't have ignored it). The question is, why would you discount at the mortgage rate? The buyer would choose not to finance because his opportunity cost of capital was less than the interest cost, so the appropriate discount rate would be less than the mortgage rate. And as long as that is true, then the borrower would pay more taxes.

Anonymous writes:

Arnold:

I attended the American Action Forum's event today, and I was extremely disappointed in your answer to one of Doug's questions.

You told the audience that the Administration's statement that "roughly 2 million jobs were created from the stimulus package" was not really an accurate statement, because the models they used to determine this number are not recognized by the academic community.

Doug proceeded to ask you, that if these models aren't recognized by the academic community, how would YOU propose to measure the effectiveness of the stimulus package? You responded with "our guts" and you weren't "joking" this time.

I'm sorry, but I think the Administration's models may be more accepted by the Academic community than "our guts". I'm hoping since you hold a PhD in economics from MIT, that you were just caught off guard by the question, and can take some time to give an actual and substantive answer... I'm really hoping the world of economics doesn't just rely on a bunch of "gut feelings".

Arnold Kling writes:

Anonymous,
I am sorry, but the state of the art in economics does not permit giving precise, accurate answers to certain questions. Asking me for a solution to the problem of measuring the jobs created by the stimulus is like asking me for a solution to the problem of making solar power cheaper than other forms of electricity. As much as you want me to do it, I cannot.

Actually, I think that eventually we may see cheap solar power. I do not think we will eventually see reliable estimates of the effect of fiscal stimulus on employment. See Macroeconometric Models and Science

Les Cargill writes:

David: (re the MID) - yes, it's still a subsidy. Imputed rents mean nothing here. I say it's a subsidy because there will always be a small (or in cases, larger) level of malinvestment in favor of buying vs. renting. Classic definition of the effect of a subsidy - you get more of it and it costs more.

I have no basis to think that any interest should ever be deductible, any more than markup at the grocery store should be. it's a skyhook, SFAIK.

Justin Dailey writes:

Anonymous - Arnold's right. There is no way to precisely know how many net jobs were created by the stimulus. On this issue, our gut feeling is as likely to be correct as any model.

One important question is how many econometric models that were used to estimate the number of net jobs created by the stimulus include a central bank reaction function (see Scott Sumner's post http://s84684.gridserver.com/?p=4301). The answer is probably that none of them do. Since most central banks set monetary policy to target a preferred rate of inflation, excess aggregate demand from fiscal policy is likely to be offset by tighter money policy. The central bank would presumably be concerned that higher aggregate demand from fiscal stimulus would boost inflation above its target rate.

If I were building a model to estmate the employment impact of the fiscal stimulus, I would include a central bank reaction function, with the central bank's monetary policy decisions offsetting the impact of the fiscal stimulus, with the result that zero net new jobs were created by the fiscal stimulus.

Despite the findings of this model, I would believe that in reality, some increase in net employment actually occured, as it is difficult for the central bank to precisely offset the effects of fiscal stimulus, and the central bank would probably prefer to err on the side of too little offset in a weak economic environment.

Justin Dailey writes:

David - You make some interesting arguments in defense of the mortgage interest deduction. I agree that technically it isn't a subsidy - leaving the money that someone earned with that person shouldn't be called a subsidy. That said, it is still tinkering with the tax code in order to skew economic incentives. We could be taxed on all of our income at a lower rate, but the government decides to lift taxes off of income used for favored (or politically popular) purposes, and raise tax rates on income used for other purposes to meet its revenue needs (or more recently, 60% of its revenue needs).

You also make a good argument that trying to be precisely fair in terms of taxing everything equally can be complicated and messy.

I think the best solution is to find out what amount of money the government needs to operate, and then implement a flat, broad tax in order to raise it. Even if that creates somewhat of a burden on someone doing something we like, the overall rate should be low enough to help keep that burden down.

The problem with deductions is that even if one deduction is defensible on its own terms (and I'm still not sure the mortgage interest deduction is - we clearly ended up with too much mortgage debt over the last cycle), the existence of one deduction is going to lead to a series of deductions for other items which sound reasonable (charitable contributions), which then leads to deductions and credits for ever more silly stuff (cash for clunkers).

Anonymous writes:

Justin-

I thank you for taking the time to provide an attempt at some type of alternative to the Administration's models that they are using.
I think that if we criticize what the Administration is doing, that we need to have a prepared substantive alternative beside "gut feelings" at an academic forum.

Anonymous writes:

Justin-

Thank you for taking the time to at least provide some type of substantive alternative. While it may be impossible to completely quantify how many jobs the Stimulus has produced, I think as economists, and especially if you are going to criticize the Administrations models, that you provide some type of substantive alternative.

David writes:

Les: All interest should be deductible to the payer because it is taxable income to the recipient. If the MID is a subsidy then I would like to ask, "at the expense of what?" It's not securities. You can deduct all your margin interest. Only consumption at the consumer level has taxable interest. Eliminate that tax and you elminate the "subsidy" to mortgage interest.

Justin: Thanks, although in light of the valid criticism I received here I certainly need to revise my argument a bit. The one part that hasn't been attacked yet is the part you picked up on. My point in mentioning the history is that it's not like mortgage interest was taxed and then it was decided to give homeowners a special break. What really happened is that no interest was taxed and then it was decided to punish consumers with credit cards.

Justin Dailey writes:

Anonymous - The problem with any alternative model is that it will suffer from the same problems as the models the administration relies on. To think of this in a different way, suppose the Obama administration was using a model to predict the weather each day for the rest of his term. We can reliably say that the weather model's results are incorrect, although ex-ante we can't build a competing model to correctly forecast the weather. See the link Arnold provided for more detail.

As for an alternative course of action to fiscal stimulus, I would prefer monetary stimulus. Fiscal and monetary stimulus are both attempting to do the same thing - increase aggregate demand (of course, the administration doesn't set monetary policy, but Obama does have a say on who he nominates as Fed chair).

David - Agreed. For me, whether we call it a subsidy, a tax incentive or something else, the problem is that tax policy favors certain types of spending. I'd rather they take what they need in a simple transparent fashion and be done with it - I'd even be willing to pay a little more in order to have a tax code like that (right now I probably pay less relative to a simple flat income/consumption tax due to progressive rates and deductions/credits).

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