Posts Tagged ‘fiscal policy’
“He said that there was death and taxes, and taxes was worse, because at least death didn’t happen to you every year”*…
There are lots of questions that surround taxation: how much? on what? for what? Scott Galloway (@profgalloway) explores a couple of others: how efficient? how fair?
* Terry Pratchett
###
As we ruminate on returns, we might recall that it was on this date in 1920 that the U.S. Supreme Court decided a case on the constitutionality of the income tax for the second and last time (so far). The Income tax had been authorized by the Sixteenth Amendment in 1913, and created later that year via the Revenue Act of 1913. In 1915 stockholders filed a brief in the U.S. Supreme Court, which arguing that the Sixteenth Amendment covers “many taxes other than on income”; in 1920, the Court affirmed the constitutionality of an income tax. Then came a second suit…
The United States Supreme Court last decided a federal income tax case on constitutional grounds in 1920, a century ago. The case was Eisner v. Macomber , and the issue was whether Congress had the power under the Sixteenth Amendment to include stock dividends in the tax base. The Court answered “no” because “income” in the Sixteenth Amendment meant “the gain derived from capital, from labor, or from both combined.” A stock dividend was not “income” because it did not increase the wealth of the shareholder.
Macomber was never formally overruled, and it is sometimes still cited by academics and practitioners for the proposition that the Constitution requires that income be “realized” to be subject to tax. However, in Glenshaw Glass , the Court held in the context of treble antitrust damages that the Macomber definition of income for constitutional purposes “was not meant to provide a touchstone to all future gross income questions” and that a better definition encompassed all “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”
In the century that has passed since Macomber , the Court has never held that a federal income tax statute was unconstitutional. This behavior of the Court constitutes a remarkable example of American tax exceptionalism, because in most other countries income tax laws are subject to constitutional review and are frequently ruled unconstitutional…
Reuven Avi-Yonah, “Should U.S. Tax Law Be Constitutionalized? Centennial Reflections on Eisner v. Macomber (1920)“
“We do not inherit the earth from our ancestors, we borrow it from our children”*…
… and the interest rate on that loan is rising.
There’s much discussion of what’s causing the sudden-feeling spike in prices that we’re experiencing: pandemic disruptions, nativist and protectionist policies, the over-taxing of over-optimized supply chains, and others. But Robinson Meyer argues that there’s another issue, an underlying cause, that’s not getting the attention it deserves… one that will likely be even harder to address…
Over the past year, U.S. consumer prices have risen 7 percent, their fastest rate in nearly four decades, frustrating households and tanking President Joe Biden’s approval rating. And no wonder. High inflation corrodes the basic machinery of the economy, unsettling consumers, troubling companies, and preventing everyone from making sturdy plans for the future…
For years, scientists and economists have warned that climate change could cause massive shortages of major commodities, such as wine, chocolate, and cereals. Financial regulators have cautioned against a “disorderly transition,” in which the world commits only haphazardly to leaving fossil fuels, so it does not invest enough in their zero-carbon replacements. In an economy as prosperous and powerful as America’s, those problems are likely to show up—at least at first—not as empty grocery shelves or bankrupt gas stations but as price increases.
That phenomenon, long hypothesized, may be starting to actually arrive. Over the past year, unprecedented weather disasters have caused the price of key commodities to spike, and a volatile oil-and-gas market has allowed Russia and Saudi Arabia to exert geopolitical force.
“This climate-change risk to the supply chain—it’s actually real. It is happening now,” Mohamed Kande, the U.S. and global advisory leader at the accounting firm PwC, told me.
…
How to respond to these problems? The U.S. government has one tool to slow down the great chase of inflation: Leash up its dollars. By raising the rate at which the federal government lends money to banks, the Federal Reserve makes it more expensive for businesses or consumers to take out loans themselves. This brings demand in the economy more in line with supply. It is like the king in our thought experiment deciding to buy back some of his gold coins.
But wait—is it always appropriate to focus on dollars? What if the problem was caused by too few goods? Worse, what if the economy lost the ability to produce goods over time, throwing off the dollars-to-goods ratio? Then what was once an adequate number of dollars will, through no fault of its own, become too many...
… if the climate scars on supply continue to grow, does the Federal Reserve have the right tools to manage? Stinson Dean, the lumber trader, is doubtful. “Raising interest rates will blunt demand for housing—no doubt. But if you blunt demand enough to bring lumber prices down, you’re destroying the economy,” Dean told me. “For us to have lower lumber prices, we can only build a million homes a year. Do you really want to do that?
“Raising rates,” he said, “doesn’t grow more trees.” Nor does it grow more coffee, end a drought, or bring certainty to the energy transition. And if our new era of climate-driven inflation takes hold, America will need more than higher interest rates to bring balance to supply and demand.
A provocative look at the tangled roots of our inflation, suggesting that “The World Isn’t Ready for Climate-Change-Driven Inflation,” from @yayitsrob in @TheAtlantic. Eminently worth reading in full. Via @sentiers.
* Native American proverb
###
As we dig deeper, we might send carefully calculated birthday greetings to Frank Plumpton Ramsey; he was born on this date in 1903. A philosopher, mathematician, and economist, he made major contributions to all three fields before his death (at the age of 26) on this date in 1930.
While he is probably best remembered as a mathematician and logician and as Wittgenstein’s friend and translator, he wrote three paper in economics: on subjective probability and utility (a response to Keynes, 1926), on optimal taxation (1927, described by Joseph E. Stiglitz as “a landmark in the economics of public finance”), and optimal economic growth (1928; hailed by Keynes as “”one of the most remarkable contributions to mathematical economics ever made”). The economist Paul Samuelson described them in 1970 as “three great legacies – legacies that were for the most part mere by-products of his major interest in the foundations of mathematics and knowledge.”
For more on Ramsey and his thought, see “One of the Great Intellects of His Time,” “The Man Who Thought Too Fast,” and Ramsey’s entry in the Stanford Encyclopedia of Philosophy.
“What is it that happens in an inflation? The unit of money suddenly loses its identity.”*…
Today the Bureau of Labor Statistics releases its Consumer Price Index for the month of March. Here is some important context to help understand the figures…
When inflation numbers come out on April 13, they will likely look very high. And measured annually, inflation will probably rise further over the next few months. These headline numbers will be used to argue against the American Jobs Plan and future infrastructure investments, and even to advocate austerity.
But this response will be wrong, for three reasons:
1) The high year-over-year inflation of the coming months will reflect the falling prices of a year ago, whether or not prices are rising more rapidly today.
2) Achieving the Federal Reserve’s price-stability goals requires a period of above-trend inflation; if inflation, correctly measured, rises modestly in the coming months, that’s a good thing.
3) Even if inflation is a genuine problem, scaling back infrastructure investment is not the solution. It might even make the problem worse…
The full explanation at “The Illusion of Inflation: Why This Spring’s Numbers Will Look Artificially High.”
(Image above: source)
* Elias Canetti, Crowds and Power
###
As we steel ourselves, we might spare a thought for James Buchanan “Diamond Jim” Brady; he died on this date in 1917. A businessman and celebrity in the Gilded Age, he made his fortune semi-scrupulously in the rail industry and less scrupulously in stock trading and fixed bets.
His appetites for indulgences of all sorts were legendarily huge; but his nickname was a nod to the main among them– to his obsession with jewels, especially diamonds. He amassed stones worth $2 million (equivalent to approximately $61,464,000 in 2019 dollars).
“Since the nation is defined by its inherent virtue rather than by its future potential, politics becomes a discussion of good and evil rather than a discussion of possible solutions to real problems”*…
Nathan Tankus (@NathanTankus) put his undergraduate studies at John Jay College of Criminal Justice on hold to become a full-time economics writer and researcher (he is Research Director at The Modern Money Network). He has been a visiting researcher at the Fields Institute and a research assistant at the University of Ottawa. He has also written for the Review of Keynesian Economics, Truthout and the financial blog Naked Capitalism. But he’s perhaps best known for (and most closely-followed on) his newsletter Notes on the Crises, from whence…
The election has come and gone, a winner has been announced and now the fallout begins. While the details are still being hashed out, and president Trump along with most of the Republican party are not accepting the results (at least not yet), my interest is not so much in the near term partisan fights but the implications of what’s happened for the future of the Coronavirus Depression. To understand this, we must look to the results in the U.S. senate. What we find there is an exceedingly mixed result. Republicans have 50 seats, Democrats have 48 seats and the final results will come from two senate runoff elections in Georgia. Even if the Democrats win those two races, that thin margin would require each and every senator to agree to pass whatever they want to pass. As I said in my pre-election piece:
This means we could possibly go until February 2021 before seeing another economic package. Worse, that package may even require a Democratic senate to become law. It’s possible that even that scenario is optimistic — it could then take a significant amount of time for Democrats to agree on a package among themselves. What happens to millions upon millions of people in that agonizing waiting period? A winter filled with a third wave of Coronavirus and no economic support to individuals is a recipe for absolute disaster — over 200,000 Americans have already died.
Since I wrote this the third wave of Coronavirus has taken off and it seems more likely than ever that we will not have an economic package passed in February. In other words, I worry that fiscal cliffication is just going to intensify. Indeed, it’s hard to imagine anything being able to break it at this point. The 2022 midterms are a long time away and there is no guarantee that the outcome would break the deadlock. We’ll likely see some sort of package go through congress in 2021 but it will very likely not be timely as the most optimistic scenarios laid out above had hoped. Meanwhile, the need is no less…
There are some overly rosy possible scenarios circulating financial twitter that make reviewing the unemployment situation important. Headline unemployment is still elevated but it is no longer at the high levels of the spring. However, this hides the damage that is happening underneath. Headline unemployment has mostly been driven by the behavior of temporary layoffs… But the real damage is in the permanent job losses.
The distinction between temporary layoffs and permanent job losses is very underemphasized in economic reporting and has led to the underlying economic damage from being missed in a lot of economics coverage. My colleagues Alex Williams and Skanda Amarnath at Employ America did a great job of making this point in their piece “The Shock and The Slog” last month. While there has been a lot of recovery in temporary layoffs, there has been a steady increase in permanent layoffs and it will likely keep on increasing as more businesses shutter and the effects of expanded benefits start filtering through the economy (and our economic data). It’s also important to emphasize that labor force participation of individuals 15-64 has only partially recovered from a very steep drop, which makes headline unemployment appear rosier than it is.
Worse still, the third wave of Coronavirus is in full swing. New York City schools could be shut as early as Monday, and indoor dining should probably already be shut. This second wave of shutdowns will be more economically harmful than the first wave because any savings they had were exhausted by the first wave and it is most likely that most affected businesses have already exhausted their access to credit (and perhaps even their willingness to take on more debt). It’s likely that the second wave of shutdowns will accelerate permanent job losses while the temporary job losses generate renewed drops in demand. In other words, the economic situation has still been deteriorating and it will likely get hammered at a time where fiscal support is, at best, months away.
In this context, the only game left in town is the Federal Reserve. Taking on responsibility for state and local governmental responses is the last thing that the Federal Reserve wants to do. However, the Federal Reserve has a mandate to to pursue maximum employment and price stability and meeting its maximum employment mandate requires it to use the tools it has available to do so…
Why the Fed is the last, best hope against post-Corona economic devastation and how that might work: “What is the Future of Fiscal Policy Now That the Election is Over?“
* “In the politics of eternity, the seduction by a mythicized past prevents us from thinking about possible futures. The habit of dwelling on victimhood dulls the impulse of self-correction. Since the nation is defined by its inherent virtue rather than by its future potential, politics becomes a discussion of good and evil rather than a discussion of possible solutions to real problems. Since the crisis is permanent, the sense of emergency is always present; planning for the future seems impossible or even disloyal. How can we even think of reform when the enemy is always at the gate?” – Timothy Snyder, On Tyranny: Twenty Lessons from the Twentieth Century
###
As we muse on Modern Monetary Theory, we might recall that it was on this date in 1994 that Noel Edmonds appeared on BBC television to announce the winning numbers in the first UK National Lottery. the draw was 30, 3, 5, 44, 14 and 22; the bonus was 10; and seven jackpot winners shared a prize of £5,874,778.
“It’s All About The Benjamins”*…
A funny thing happened on the way to a world of cryptocurrencies and mobile payments. Cash became more popular than ever. The main reason? The one hundred dollar bill.
In 2017, for the first time ever, the one hundred dollar bill became the most popular US bill in circulation, beating out the one dollar bill. It is quite the turn of events for Benjamin Franklin-faced banknote. Just 10 years ago, it was less common than both the $20 and the $1.
The share of US dollars in circulation as a share of GDP rose from about 6% in 2010 to 9% in 2018, according to the Federal Reserve. Increased use of $100 bills has been the primary driver…
Why cash is king: “There are now more $100 bills than $1 bills in the world.”
* Puff Daddy
###
As we contemplate currency, we might spare a thought for Franco Modigliani; he died on this date in 2003. An economist, he originated the life-cycle hypothesis, which attempts to explain the level of saving in the economy, suggesting that consumers aim for a stable level of consumption throughout their lifetime (for example by saving during their working years and then spending during their retirement)– for which he was awarded the Nobel Prize in Economics in 1985.
Among his other accomplishments, he initiated the Monetary/Fiscal Debate when he (and co-author Albert Ando) wrote a scathing critique of an early 1960s paper by Milton Friedman and David Meiselman. Freidman and Meiselman had argued (in effect) that monetary policy was the only effective tool in managing an economy; Modigliani and Ando pointed out flaws in their analysis and made the case for fiscal measures (effectively, government spending) as equally-effective tools. The debate– known by the antagonists’ initials as the AM/FM Debate– rages to this day.
You must be logged in to post a comment.