Saturday, September 12, 2015

Poor Journalism

See the following story written by Matt Egan at CNN Money:


1. "It's no secret that China is the largest holder of U.S. debt." There is no secret because it is not even true.  ALL foreign holders of US government debt make up less than 50% of publicly held national debt.  China is the largest "foreign" holder but holds less than 10%.  Interestingly, as recently as 2008, Japan was the largest foreign holder of US debt and was for many years.  In addition, since 2008, Japan has owned almost as much China yet I never see an article written about Japan's US debt holdings.
It is misleading and inaccurate to refer to China as the largest holder when US individuals, pension funds, mutual funds, banks, and insurance companies hold significantly more.
2. "China is dumping US debt" - According to US Treasury data, China's holding increased from Jan 2015 through June 2015 (last date for published data).  Where is the evidence, source?  Wonderfully inaccurate, misleading, and unsubstantiated headline.
3. "But China's foreign-exchange reserves plunged by a record $94 billion in August, according to the country's central bank, leaving it with a war chest of $3.6 trillion. Analysts say it's very safe to believe a big chunk of that decline occurred due to a reduction in U.S. Treasury holdings." - Since the most recently published data show China increasing their holdings of US debt, it would certainly be proper journalism to provide some reference or source for the data. Who are the "analysts"?
4.  Even if #3 is true, a "big chunk" of $94 billion is just 2% of their "war chest" and if they are actually "dumping" US debt as stated by your unknown analyst, at most $94 billion would result in about 7.5% of their US debt holdings, but probably less than that depending on what the mathematical equivalent of "big chunk" is.

This article should never have been published.  The editors at CNN Money need to do some better quality control.

Friday, March 13, 2015

Teaching the Elasticity Concept - Traffic Fines Based on Income

Adjusting the size of penalties and fines to income sends the same price signal to everyone.  This system is not only fair, it makes economic sense given that the purpose of a system of fines and penalties is to create socially accepted deterrents for reducing socially unacceptable behavior.  Using a sliding scale for the fine takes into account the inelasticity of demand for those who are wealthy. 


Most of Scandinavia determines fines based on income. Could such a system work in the U.S.?

Read More:

Monday, March 2, 2015

The Importance of "Scoring" Government Policy

Recently, House Republicans have quietly made some changes to how future tax and spending laws are analyzed for their estimated costs and benefits on government budgets and the economy.  This concept is referred to as "scoring". Up until these recent changes, we had been using "static scoring".  Republicans would prefer "dynamic scoring".

Under static scoring, the estimated effects of proposed spending and tax policies are based on the notion of a fixed government pie.  Think of this as more of a microeconomic analysis of how the policy might alter relative prices, change behavior, and impact sensitive populations.  Static scoring does not emphasize an estimate of the future economic pie enhancing qualities of the change in behavior, to do so would be to use the analysis to “dynamically” score the proposed policy.  Dynamic scoring is an attempt to estimate the future economic impacts of proposed spending and tax policies and include those estimates into a measure of how the future economic pie might change.  Therefore, dynamic scoring relies on long term assumptions about economic growth, interest rates, inflation, and the global economy.  Policy changes that might suggest future increases in the economic pie might be scored higher despite near term budget deficits or adverse impacts on sensitive populations.   

Static scoring evaluates the proposed spending or tax policy with emphasis on the government’s current budget and looks to see if the policy is paid for with offsetting taxes or spending.  Static scoring also evaluates policy based on how the economic pie is divided.  The logic behind using static scoring is that if the uncertain dynamic macroeconomic benefits of the proposed policy do not materialize, then there is less harm done because the dynamic macro effects were not taken into account – there was no expectation.  If they do materialize, then it is a bonus.  However, the downside of static scoring is that policy makers may be too fiscally conservative (ironic?) and the process could result in a bias away from major policy and tax code overhauls.

To adopt dynamic scoring means that spending and tax policy proposals and their acceptance will be influenced by uncertain macro effects.  Dynamic scoring could also include assumptions about future changes in other policies.  As one might guess, this opens up opportunities to manipulate estimates based on preferred economic assumptions which have the potential to be politically driven. If policy proposals are favored based on dynamic scoring and the estimated economic benefits do not materialize, we may be left with deficit increasing and economic pie reducing policies.  Dynamic scoring puts more weight and consequences on correctly predicting the future in a very uncertain world.

Saturday, February 28, 2015

Capitalism, Socialism, and Communism are all Social Contracts

I recently engaged in a conversation with a few conservatives following a recent article on the ACA and the current Supreme Court case.  Our conversation turned, as it always seems to do, to the proper role of government.  Should government have the right to tax (or as some would say, "tell people what to do")?  This was my response.

OK, I follow your argument. You're upset about being told what to do and you think that if we just leave it all up to benevolent wealthy people to provide public goods through charity when they "please", everything will be better. But we know it will not, too many of the haves will free ride off those they feel are even better off, it's human nature. In the end, we will not be able to provide an adequate level of public goods and services needed by society, and that will have very costly long term effects. We know from economic research and historical trial and error that the best solution is to create some sort of fair social contract. Don't get hung up on government, government is synonymous with social contract. Our mixed private/public system is one form of the contract, socialism and communism are others. We get to choose the contract that we feel is best but no contract will be perfect nor will everyone like it the same. Some will attempt to take advantage of the loopholes in the contract, some will argue they are overly burdened in the contract, that's never going to change. When you change the terms of the contract to help some, it will always cause others to pay more, you hope that on net the changes you made to help outweigh those who lose. The ACA could have been better but those who were going to lose paid their lobbyists more to weaken cost control measures on the health care industry. We caved on making the penalty (read: incentive to encourage the right balance in the social contract) for not getting insurance by those financially capable high enough. Yet despite these shortcomings, which hopefully government can address in future years, the ACA is on net, better social contract language then we had, that is not disputable. If others can come along and suggest better contract language that our best economic estimates say,on net, will be better than what we have now, I'll be there to vote for it even if that means I'm one of the losers, because that's what successful societies and economic systems need to do.

Tuesday, November 18, 2014

Playing the "STUPID" Card...

The tax on high-end employer provided health benefits (a.k.a. the Cadillac tax) is the same tax that is at the heart of the comments made by Jonathan Gruber that some are using to suggest that American's were lied to.  Yet, the discussion about changing the tax code to reflect the bias treatment of employment compensation has been debated many times before (see article link below).

There is often a big difference between who legally pays a tax (who the tax code imposes the tax on) and who "economically" pays the tax.  Hence, Gruber's newly surfaced comments at conferences and class lectures about how the tax would be shifted in part to everyone in the market is basic microeconomics albeit not that well understood.  I agree his choice of words was poor, but if the point about the economic incidence of the tax was made explicit, as Gruber stated, the bill wouldn't have passed and we would still have millions of uninsured people.

Based on the "current" conservative line of logic, all FICA taxes are a "lie" because taxes legally  levied on your employer for their Social Security and Medicare contribution of your behalf are actually born partially out of your wages depending on the wage sensitivity in the labor market.  The tax on cigarette manufacturers is a lie because the tax is economically born by smokers who are very insensitive to price (little decrease in consumption) when it goes up because of the tax.

The conservative media is turning this basic economic reality into a farce.  They appear to be very sensitive to being called stupid yet by making the whole argument about a "lie" appear to be, well, actually stupid.

Check out this article from the Houston Chronicle from 1/28/2007.  It is the very same tax, the "Cadillac Tax", being proposed by the Bush Administration in 2007.  This is not a new concept for conservative policy makers.  They know all about this tax and know this economic concept.  What they are really doing is playing the "stupid" card, literally and figuratively, on their conservative base.  So let me ask, who's really stupid here?