The View from Right Field

Tax Reform Versus the 2021 Democratic Congress

In 2017, the Republican Congress passed real tax reform legislation.  Democrats claimed it was just tax cuts for the rich, but they pretty much always say that.  What is funny about that claim (“funny” in the bizarre sense, not funny in the ha-ha sense) is that one of the things the Democrats objected to the most in the reform was the limitation on the deduction of state and local taxes (i.e., the “Salt deduction”) to $10,000 for a couple, even though the legislation also doubled the standard deduction.  For most people, and especially middle class and below, this was a great deal.  It made tax filing simpler, and it saved them some money.  For upper middle class people in states with high local taxes, i.e., Democratic states, it wasn’t.  So, Democrats from states like California, New York, New Jersey, etc., have been pushing hard to reinstate the full SALT deduction ever since, even though it would almost entirely benefit the upper middle class.¹ 

In any case, then-House Speaker Paul Ryan and other Republicans did real tax reform.²  They were trying to make the tax system better: simpler, easier to comply with, less inefficient, raising the most money with the fewest negative impacts on the economy.  In other words, real tax reform.

“Treat Them Mean, Keep Them Lean” Is Terrible Advice for Any Situation – Political, Economic, or Personal

A week ago, Chris Giles wrote in the Financial Times about the belief, fashionable in both politics and economics, “that companies respond best to a ‘treat them mean, keep them lean’ approach.”¹  Mr. Giles concluded his piece:

“While there are some exceptions, making life difficult for business does not improve corporate performance.  ‘Treat them mean, keep them lean’ is terrible advice for healthy relationships.  It is just as bad in economic policy.”

Which I agreed with in a letter than was published in Tuesday’s FT, making a point I have made before (since FT has a very high paywall, here is the letter, as published):

Is This the Way to Set Up New Social Programs?

As Democrats scramble to come up with a bill of social and climate-related programs that can pass, two big questions seem to dominate.

First, while normally you would think that government should decide what it needs to do and then come up with a way to pay for it, that is not what Democrats are doing.  Rather, they are figuring out how much they want to spend first.  Actually, it’s not how much they want to spend.  It’s what number sounds good politically.  $3.5 trillion was too high for some people.  Joe Manchin said $1.5 trillion was okay, but that’s too low for the progressives.  So they will probably come up with some number in between, though apparently closer to $1.5 trillion than $3.5 trillion.  Still, their first question isn’t what to do; it’s how much to spend. 

“Don’t Worry About Inflation. It’s Transitory.”

That’s what Jerome Powell, Chair of the Federal Reserve, and most leading economists are telling us.  The idea is that the surge in inflation reflects the fact that last year at this time prices were down due to the pandemic.  The stay-at-home orders, the fact people wanted to avoid contact with other people, etc., cut demand and prices were down.  Now, demand is up, plus there are kinks in supply chains, which is pushing prices up.  Once those things are over, inflation will go back down.  Which may be true.

But what that explanation misses is that, while the rate of inflation may go back down, those increased prices, which the surge in inflation gave us, are going to stay up.  Just because the rate of inflation goes back down at some point in the future, doesn’t mean that the prices on groceries or anything else are doing to go back down to where they were.

Big Changes Coming?

Monday is the Democrats’ self-declared day of decision, the day Democratic leaders in Congress have set as their deadline for passing a huge package of new social programs.  Whether it is going to pass – and/or what’s going to be in it – is unclear, but Monday is supposed to be the day. 

The programs include things that European countries already have, so we should have them, too, we are told.  Of course, Democratic leaders don’t explain that Europeans get these benefits because they, i.e., the middle class, pays more taxes than we pay in the United States.  Joe Biden has said that all these new benefits are “free,” by which he means “free” for the middle (and upper middle) class, because taxes are being raised on corporations and the rich and not the middle (and upper middle) class.

The Diversity We Are Missing Today

In of his new book, Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy, Jeffrey Garton writes about the meetings at Camp David on August 13 to 15, 1971, when Richard Nixon and small group of advisers¹ broke the link between gold and the US dollar (i.e., “closing the gold window”), instituted wage-and-price controls, and more.²  In describing the meeting Mr. Garton emphasizes there was a real diversity among those present.  It was not, course, a diversity of race or sex.  They were all white men.  (It was, after all, 1971.)  But there was a diversity of viewpoints.  Coming into the meeting, some opposed wage-and-price controls (President Nixon had always opposed them because of his experience in the Office of Price Administration in 1942); some were okay with them.  Some thought we needed to close the gold window immediately; others wanted to do the rest of the program and then wait and see.  The investment tax credit, which had recently been repealed, was to be reinstated.  The key was that a number of people with different viewpoints met, talked, and in a weekend came up with a set of policies to change the world economic system.³

Inflation – Or Not

Both the Federal Reserve and the Biden administration, Jerome Powell and Janet Yellin, among others, respectively, want more inflation.  The Fed has changed its inflation target from a top of 2% to an average, over a period of time, of 2%.  Also, the Fed has indicated that, instead of reacting in advance of inflation exceeding 2%, it will now wait to act until after inflation has exceeded its 2% target.

For 40 years, inflation has not been a big deal.¹  The question is whether that will continue to be true in the future.  It may be that inflation is gone.  Or it may be, now that we have forgotten how bad inflation can be, that we won’t be careful about keeping inflation under control in the future, and that it will come back – good and hard.

Spending Lots; Doing a Little Good

Nancy Pelosi famously¹ said of Obamacare that you had to pass it to see what was in it.  It appears that was true of Joe Biden’s first big Covid relief bill, too.  In January, I said this about President Biden’s proposed plan in a post entitled “Covid-19 Relief Ought to Be More Than Just Throwing Money Around Randomly”:

“A properly-targeted pandemic relief program wouldn’t waste money by giving it to people who don’t need help.  If we target the help where it is needed, there will be more money for the people who actually need help.  It’s not a matter of cutting costs; it’s a matter of having enough money to help those who really need it.”

Models, Calculators, and Certainty

Last weekend, The Wall Street Journal had an interview with Steven Koonin, who was chief scientist for the Energy Department under Barack Obama.  In the course of the interview, Dr. Koonin said some things about models and how they are used that resonated with me (probably because I have some of the same concerns.

Dr. Koonin said, of younger scientists today: “They have grown up with the models.  They don’t have the kind of mathematical or physical intuition you get when you have to do things by pencil and paper.”

The US Economy Is On a Path To Do Fine – As Long As

Per an article in yesterday’s Financial Times¹:

“Most advanced countries will emerge from the coronavirus crisis with little lasting damage, thanks to relatively rapid rollout of vaccines and a willingness to increase sharply spending and borrowing, according to the I[nternational] M[onetary] [F]und. …

The fund was bullish about prospects of a rapid US recovery without inflationary pressures.  [IMF chief economist Gita] Gopinath said: ‘The US is really the only large economy whose {economic output} for 2022 is projected to exceed what it would have been in the absence of this pandemic.’”