The first thing to note about recessions and recoveries is that they have nothing to do with tax.
Cutting taxes and running a deficit doesn't reduce the cost of government expenditure; it merely puts off the reckoning of who bears the cost of that expenditure.
Running a deficit during a recession can be a good thing because the lower taxes and higher government spending that it implies can boost aggregate demand for goods and services and get the economy to put its existing productive capacity back to work. But budget deficit erodes investment. I+CA=Sg+Sp.
Some who favor tax cuts do so in part because they hope that the lower revenue, and the deficits that accompany it, will put pressure on Congress to restrain its spending. "Starve-the-beast" strategy
Whether tax cuts will eventually effectively restrain government spending is totally an empirical question. Recent history actually shows an inverse relation. \
No simple relationship or single graph can establish how the tax system affects economic prosperity or growth.
A preponderance of evidence suggests that male hours worked respond hardly at all to changes in after-tax wage rates.
Tax on the returns to saving and business investment distort the choices of individuals, encouraging people to consume more today and save less for the future than they otherwise would.
Identifying which goods and services are more or less responsive to taxation is difficult. Even if economists could measure such things accurately, differentiating taxes according to this approach often conflicts with both equity and simplicity. Politicians are unlikely to distinguish among goods based solely on their price sensitivity.
1/22/2013
1/19/2013
Horizontal equity
Horizontal equity principle: tax liability ought to be the same for any two families with the same level of well-being.
Tax code is the most discriminatory body of law in a country that has tried to exterminate discrimination everywhere else in society. ---- Alvin Rabushka
We are all in the tax game together, and what is a privilege to one group of people ends up being a penalty to everyone else through high tax rates.
Taxing some goods but not others would not be a major problem for horizontal equity if the taxed goods represented the same share of total income for most people. The fact that tastes vary renders horizontally equitable a policy that relates tax burden to tastes.
Many aspects of the U.S. income tax system can be viewed as discriminating against certain people simply because of their tastes.
As long as we desire a progressive tax system based on family income, there is no way to make it also marriage-neutral.
Tax code is the most discriminatory body of law in a country that has tried to exterminate discrimination everywhere else in society. ---- Alvin Rabushka
We are all in the tax game together, and what is a privilege to one group of people ends up being a penalty to everyone else through high tax rates.
Taxing some goods but not others would not be a major problem for horizontal equity if the taxed goods represented the same share of total income for most people. The fact that tastes vary renders horizontally equitable a policy that relates tax burden to tastes.
Many aspects of the U.S. income tax system can be viewed as discriminating against certain people simply because of their tastes.
As long as we desire a progressive tax system based on family income, there is no way to make it also marriage-neutral.
Vertical equity and tax progressitivity
A property results in tax payments that varies with the value of the property. Under the poll tax, however, every adult in a given local jurisdiction pays the same annual tax, period. For example, the duke with his estate paid the same tax as the butcher in his three-room flat.
There are two distinct aspects to the fairness of a tax system. First, called vertical equity by economists, concerns the appropriate tax burden on households of different levels of well-being.
A tax system can be evaluated against another standard of fairness--under what circumstances is it acceptable that two equally well-off households bear a different tax burden? (horizontal equity)
If everyone pays the same percentage of income in tax, regardless of income, then the tax is called proportional.
One tax structure is more progressive than another if the average tax rate (tax liability as a percentage of income) rises more rapidly with income.
Two principles for determining the fair distribution of tax burden across income classes.
(1) benefit principle: each person's tax burden ought to be commensurate to the benefits he or she receives from the gov.t.
Trouble: sometimes it is hard to determine exactly how much each citizen benefits
If the benefit principle supports a progressive tax system, it does so not to ameliorate income inequality or redistribute income but instead to "charge" correctly for the progressive benefits of government programs.
(2) ability-to-pay principle: the tax burden should be related to the taxpayer's level of economic well-being.
In principle, there could be substantial inequality in annual incomes even if everyone ended up earning the same total income over a lifetime. The best available evidence suggests that the distribution of long-term income is only a bit less unequal than the distribution of single-year income. There is also evidence that the growing inequality of annual incomes over the last few decades have been matched to a large extent by growing inequality in lifetime incomes.
Trouble: we have no way to quantitatively compare across individuals the sacrifice caused by having less money. There is no objective way to measure and compare the degree of sacrifice across people.
There are two distinct aspects to the fairness of a tax system. First, called vertical equity by economists, concerns the appropriate tax burden on households of different levels of well-being.
A tax system can be evaluated against another standard of fairness--under what circumstances is it acceptable that two equally well-off households bear a different tax burden? (horizontal equity)
If everyone pays the same percentage of income in tax, regardless of income, then the tax is called proportional.
One tax structure is more progressive than another if the average tax rate (tax liability as a percentage of income) rises more rapidly with income.
Two principles for determining the fair distribution of tax burden across income classes.
(1) benefit principle: each person's tax burden ought to be commensurate to the benefits he or she receives from the gov.t.
Trouble: sometimes it is hard to determine exactly how much each citizen benefits
If the benefit principle supports a progressive tax system, it does so not to ameliorate income inequality or redistribute income but instead to "charge" correctly for the progressive benefits of government programs.
(2) ability-to-pay principle: the tax burden should be related to the taxpayer's level of economic well-being.
In principle, there could be substantial inequality in annual incomes even if everyone ended up earning the same total income over a lifetime. The best available evidence suggests that the distribution of long-term income is only a bit less unequal than the distribution of single-year income. There is also evidence that the growing inequality of annual incomes over the last few decades have been matched to a large extent by growing inequality in lifetime incomes.
Trouble: we have no way to quantitatively compare across individuals the sacrifice caused by having less money. There is no objective way to measure and compare the degree of sacrifice across people.
1/17/2013
Why protection is costly
TBTF policies seem to have played a role in the collapse of the financial systems and economies in a number of developing countries over the last decade or so.
When franchise value is high, owners and managers have something to lose, and they should take steps to make failure less likely. Franchise value depends, in part, on the level of competition in the relevant markets. Because competition in banking is often limited by regulation, banks could have an easier time generating future profits than firms in other, more competitive industries.
But now governments have relaxed some of the regulations that limited the ability of banks to enter a market and compete with established firms. New financial technologies also have raised the level of competition banks face.
Besides encouraging excessive risk-taking and wasting resources, there is a second manner in which expectation of TBTF coverage could lead to inefficiency. Recent work continues to cite this negative effect on innovation as one of the most damaging aspects of government control or influence of private sector firms.
When franchise value is high, owners and managers have something to lose, and they should take steps to make failure less likely. Franchise value depends, in part, on the level of competition in the relevant markets. Because competition in banking is often limited by regulation, banks could have an easier time generating future profits than firms in other, more competitive industries.
But now governments have relaxed some of the regulations that limited the ability of banks to enter a market and compete with established firms. New financial technologies also have raised the level of competition banks face.
Besides encouraging excessive risk-taking and wasting resources, there is a second manner in which expectation of TBTF coverage could lead to inefficiency. Recent work continues to cite this negative effect on innovation as one of the most damaging aspects of government control or influence of private sector firms.
1/16/2013
what's the problem
The roots of the TBTF problem lie in creditors' expectations. The problems arises when uninsured creditors of large, systemically important banks expect to receive government protection if their bank fails. These expectations lead banks that creditors consider too big to fail to take on too much risk and waste resources.
The underlying source of the TBTF problem is a lack of credibility. Policymakers haven't convinced uninsured creditors of TBTF banks that government will minimize the financial support they receive. Government has to figure out more effective ways to let banks know that the support is limited. Authors think that the costs of TBTF protection exceed the benefits it provides.
The reason why government want to bail out the banks is the negative externality of the bank failure. Banks face comprehensive and stringent government direction and review of their activities.
Protection of uninsured creditors of bank is one major feature that underlies any description of too big to fail. The second feature is bank size.
The price and quantity signals from creditors that previously would have constrained bank activities are muted by the expectation of TBTF protection. Every insurance policy creates a moral hazard. The excessive risk-taking by banks is costly due to resource misallocation. Excessive risk-taking also manifests itself in the provision of loans that would not be made if bank creditors bore the risk of bank failure.
The essence of the TBTF problem is that creditors believe they will receive protection on the failure of their bank despite not having an explicit right to it.
The underlying source of the TBTF problem is a lack of credibility. Policymakers haven't convinced uninsured creditors of TBTF banks that government will minimize the financial support they receive. Government has to figure out more effective ways to let banks know that the support is limited. Authors think that the costs of TBTF protection exceed the benefits it provides.
The reason why government want to bail out the banks is the negative externality of the bank failure. Banks face comprehensive and stringent government direction and review of their activities.
Protection of uninsured creditors of bank is one major feature that underlies any description of too big to fail. The second feature is bank size.
The price and quantity signals from creditors that previously would have constrained bank activities are muted by the expectation of TBTF protection. Every insurance policy creates a moral hazard. The excessive risk-taking by banks is costly due to resource misallocation. Excessive risk-taking also manifests itself in the provision of loans that would not be made if bank creditors bore the risk of bank failure.
The essence of the TBTF problem is that creditors believe they will receive protection on the failure of their bank despite not having an explicit right to it.
preface
Too big to fail is no theoretical problem, but rather a central public policy dilemma.
Determining the appropriate policy response to an important failing bank has long been a vexing public policy issue. To the extent that creditors of TBTF banks expect government protection, they reduce their vigilance in monitoring and responding to these banks' activities. (Moral hazards)
When creditors exert less of this type of market discipline, the banks may take excessive risks.
Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible and therefore are ineffective. The primary reason why policymakers bail out creditors of large banks is to reduce the chance that the failure of a large bank in which creditors take large losses will lead other banks to fail to capital markets to crease working effectively.
Besides, policymakers may provide protection because doing so benefits them personally. Incompetent central planning may also drive some bailouts. But these reasons are less important than the motivation to dampen the effect of a large bank failure on financial stability.
Empirical and anecdotal data, analysis, and general impression suggest that TBTF protection imposes net costs.
TBTF problem has grown in severity. Reasons for this increase include growth in the size of the largest banks, greater concentration of banking system assets in large banks, the greater complexity of bank operations, and several trends in policy, including a spate of recent bailouts.
There is controversy over the the net cost of TBTF protection. Some analysts also argue that big banks fail anyway even without the TBTF protection. Still some other analysts argue that in practice the American legislation makes it impossible to have TBTF problem. Some other people think that there is no realistic solution to the problem.
Authors argue that policymakers can enact a series of reforms that reduce expectations of bailouts for many creditors at many institutions.
Countries should create or reinforce the rule of law, property rights and the integrity of public institutions. Incorporating the costs of too big to fail into the policymaking process. Appointment of leaders who are loath to, or at least quite cautious about, providing too big to fail bailouts. Better accounting for too big to fail costs and concern about the disposition of policymakers should restrain the personal motivation that might encourage too big to fail protection.
Determining the appropriate policy response to an important failing bank has long been a vexing public policy issue. To the extent that creditors of TBTF banks expect government protection, they reduce their vigilance in monitoring and responding to these banks' activities. (Moral hazards)
When creditors exert less of this type of market discipline, the banks may take excessive risks.
Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible and therefore are ineffective. The primary reason why policymakers bail out creditors of large banks is to reduce the chance that the failure of a large bank in which creditors take large losses will lead other banks to fail to capital markets to crease working effectively.
Besides, policymakers may provide protection because doing so benefits them personally. Incompetent central planning may also drive some bailouts. But these reasons are less important than the motivation to dampen the effect of a large bank failure on financial stability.
Empirical and anecdotal data, analysis, and general impression suggest that TBTF protection imposes net costs.
TBTF problem has grown in severity. Reasons for this increase include growth in the size of the largest banks, greater concentration of banking system assets in large banks, the greater complexity of bank operations, and several trends in policy, including a spate of recent bailouts.
There is controversy over the the net cost of TBTF protection. Some analysts also argue that big banks fail anyway even without the TBTF protection. Still some other analysts argue that in practice the American legislation makes it impossible to have TBTF problem. Some other people think that there is no realistic solution to the problem.
Authors argue that policymakers can enact a series of reforms that reduce expectations of bailouts for many creditors at many institutions.
Countries should create or reinforce the rule of law, property rights and the integrity of public institutions. Incorporating the costs of too big to fail into the policymaking process. Appointment of leaders who are loath to, or at least quite cautious about, providing too big to fail bailouts. Better accounting for too big to fail costs and concern about the disposition of policymakers should restrain the personal motivation that might encourage too big to fail protection.
1/13/2013
The theory of money
double coincidences of want and single coincidence of want
The origin of money (as distinct from coin, which is only one variety of money) is, as we have seen, entirely natural and thus displays legislative influence only in the rarest instances. Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.
Because money is a natural product of human economy, the specific forms in which it has appeared were everywhere and at all times the result of specific and changing economic situations.
The chief defects involved in the use of the precious metals for monetary purposes are: (1) the difficulty of determining their genuineness and degree of fineness, and (2) the necessity of dividing the hard material into pieces appropriate to each particular transaction. These difficulties cannot be removed easily without loss of time and other economic sacrifices.
The economic importance of the coin, therefore, consists in the fact that (apart from saving us from the mechanical operation of dividing the precious metal into the required quantities) its acceptance saves us the examination of its genuineness, fineness, and weight. When we pass it on, it saves us from giving proof of these facts. Thus it frees us from many irksome, wearisome, procedures involving economic sacrifices, and as a consequence of this fact, the naturally high marketability of the precious metals is considerably increased.
The origin of money (as distinct from coin, which is only one variety of money) is, as we have seen, entirely natural and thus displays legislative influence only in the rarest instances. Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.
Because money is a natural product of human economy, the specific forms in which it has appeared were everywhere and at all times the result of specific and changing economic situations.
The chief defects involved in the use of the precious metals for monetary purposes are: (1) the difficulty of determining their genuineness and degree of fineness, and (2) the necessity of dividing the hard material into pieces appropriate to each particular transaction. These difficulties cannot be removed easily without loss of time and other economic sacrifices.
The economic importance of the coin, therefore, consists in the fact that (apart from saving us from the mechanical operation of dividing the precious metal into the required quantities) its acceptance saves us the examination of its genuineness, fineness, and weight. When we pass it on, it saves us from giving proof of these facts. Thus it frees us from many irksome, wearisome, procedures involving economic sacrifices, and as a consequence of this fact, the naturally high marketability of the precious metals is considerably increased.
commodity money
commodity money has the great advantage of being an item of consumption and a means of exchange. Unlike paper money and cheap coins that can easily lose their face value, commodity money has a value in and of itself and thus can always be consume whatever the status of the market is.
The use of commodity money has never disappeared, and it rises again whenever the normal flow of commerce and economic life is interrupted. Consumable commodities such as tobaccos and chocolates serve as adequate means of exchange, but they cannot perform the full function of money.
(1) they make a poor store of value (deterioration leads to loss of value)
(2) commodities money is accepted because people see value in it, but geographical difference implies that one particular kind of commodity money may not be accepted elsewhere.
(3) the value of commodity money is not widely fungible due to its natural size
Money never exists in a cultural and social vacuum.
The use of commodity money has never disappeared, and it rises again whenever the normal flow of commerce and economic life is interrupted. Consumable commodities such as tobaccos and chocolates serve as adequate means of exchange, but they cannot perform the full function of money.
(1) they make a poor store of value (deterioration leads to loss of value)
(2) commodities money is accepted because people see value in it, but geographical difference implies that one particular kind of commodity money may not be accepted elsewhere.
(3) the value of commodity money is not widely fungible due to its natural size
Money never exists in a cultural and social vacuum.
Utopian economics
Money, did you but use it right, is a good thing in life, a necessary thing in civilised human life, as complicated, indeed, for its purposes, but as natural a growth as the bones in a man's wrist, and I do not see how one can imagine anything at all worthy of being called a civilisation without it. It is the water of the body social, it distributes and receives, and renders growth and assimilation and
movement and recovery possible. It is the reconciliation of human interdependence with liberty.
It has been suggested by an ingenious thinker that it is possible to use as a standard of monetary value no substance whatever, but instead, force, and that value might be measured in units of energy.
all heating is done by electricity, not coal; how the electricity is generated is left unsaid
One thing that distinguishes the Utopian world from ours is an emphasis on eugenics: the "unfit" are not allowed to have children, but the "fit" are encouraged to. My question is who decides "fit" or "unfit".
It speaks one language, which is similar to English. What about the diversity?
a world government? Okay, how to solve the incentive and information problem?
movement and recovery possible. It is the reconciliation of human interdependence with liberty.
It has been suggested by an ingenious thinker that it is possible to use as a standard of monetary value no substance whatever, but instead, force, and that value might be measured in units of energy.
all heating is done by electricity, not coal; how the electricity is generated is left unsaid
One thing that distinguishes the Utopian world from ours is an emphasis on eugenics: the "unfit" are not allowed to have children, but the "fit" are encouraged to. My question is who decides "fit" or "unfit".
It speaks one language, which is similar to English. What about the diversity?
a world government? Okay, how to solve the incentive and information problem?
1/12/2013
Why study public finance?
The goal of public finance is to understand the proper role of the government in the economy. Why is the government the primary provider of goods and services such as highways, education, and unemployment insurance, while provision of goods and services such as clothing, entertainment, and fire insurance is generally left to the private sector? What kinds of taxes should be levied, who should pay them, and what effects do they have on the functioning of the economy?
Four questions of public finance"
(1) When should the government intervene in the economy?
(2) How might the government intervene?
(3) What is the effect of those interventions on economic outcomes?
(4) Why do governments choose to intervene in the way that they do?
The first motivation for government involvement in the economy is the existence of market failures. The second reason for government intervention is redistribution.
Several different general approaches that the government can take to intervention:
(1) tax or subsidize private sale or purchase
(2) restrict or mandate private sale or purchase
(3) public provision: have the government provide the good directly in order to potentially attain the level of consumption that maximizes social welfare.
(4) public financing of private provision: government finances private entities to provide the desired level of provision.
The direct effects are those that would be predicted if individuals did not change their behavior in response to the interventions. The indirect effects are those arise only because individuals change their behavior in response to the intervention.
A key feature of governments is the degree of centralization across local and national government units.
Four questions of public finance"
(1) When should the government intervene in the economy?
(2) How might the government intervene?
(3) What is the effect of those interventions on economic outcomes?
(4) Why do governments choose to intervene in the way that they do?
The first motivation for government involvement in the economy is the existence of market failures. The second reason for government intervention is redistribution.
Several different general approaches that the government can take to intervention:
(1) tax or subsidize private sale or purchase
(2) restrict or mandate private sale or purchase
(3) public provision: have the government provide the good directly in order to potentially attain the level of consumption that maximizes social welfare.
(4) public financing of private provision: government finances private entities to provide the desired level of provision.
The direct effects are those that would be predicted if individuals did not change their behavior in response to the interventions. The indirect effects are those arise only because individuals change their behavior in response to the intervention.
A key feature of governments is the degree of centralization across local and national government units.
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