Thursday, November 7, 2019

Medicare For All Can Work, But We Shouldn't Pursue It

Debating the logistics of recent healthcare proposal is futile since they all would work if implemented and would be vastly better than our current system; however, that doesn't mean we should definitely pursue one of these plans, Medicare For All. 

What are the best Arguments Against Single-payer Healthcare?

1) It's electorally damaging. The public option polls around the 70% range for voters. This is a very high percentage, particularly considering the current level of polarization in U.S. politics. There's virtually no other salient topic that is this popular with Americans. M4A, on the other hand, polls in the 40% region. A cut of 30% in popularity will make people less likely to vote for you. It wouldn't cause a collapse of the Democrats, but marginal races, like the presidency, or counties that moderates fought so hard to get in 2018, would be in jeopardy. 

2) It's politically untenable. Any healthcare bill proposed would need some amount of support from Republican Senators. This is simply a reality of the Senate with its current make up. Going back to the polls, the public option polls in the mid 40% range among Republicans, whereas M4A is around 15%. This means that Republican senators in the purplish-red states could be incentivized to support a public option or face backlash. Opposing M4A would not only help them among their base, but with independents as well, and would be a smart political move. Before you claim that Republicans wouldn't vote for a public option anyways, the topic of healthcare is very salient. Republicans could have repealed Obamacare, but thanks to moderate Republicans, like McCain, their efforts were thwarted. Healthcare is one of the few topics both sides may be able to come together on.

3) It is expensive. MFA is more expensive than a public option. Estimates suggest that M4A would cost about $2.5 trillion per year, and federal expenditures would increase by $32.0 trillion over the next ten years. To put this into perspective, the Iraq War cost us about 2 trillion a year and the annual cost of M4A is roughly 62% of the size of the annual budget for 2017, and 75% of current annual revenues. 

But, other countries, like Canada and the United Kingdom, have a singleplayer system. If they can find a way to pay for it, so can we, right? Not quite, not only is it inaccurate to equate single-payer and universal healthcare, but it is also disingenuous to equate Bernie Sanders' healthcare plan with single-payer plans across the world. M4A would cover hospital visits, primary care, medical devices, lab services, maternity care, and prescription drugs as well as vision and dental benefits. By contrast, the Canadian system doesn't cover vision and dental care, prescription drugs, and rehabilitative and home services. Two-thirds of Canadians take out private insurance plans in order to cover these costs. You seem similar things in Northern European countries or countries like Taiwan and Australia. Furthermore, M4A gets rid of out-of-pocket spending, excluding prescription drugs. This means that there would be no costs of going to the doctor and no copayments when you go to the emergency room. Most international single-payer systems require some form of payment for most services, at a low cost. For example, in Australia, people pay 15 percent of the cost of visiting a doctor. 

The money will have to come from increases in taxes, and it will be difficult to not raise taxes on the middle class. Elizabeth Warren just released a plan that comes close to not doing so, but it's unclear if she will actually raise enough revenue. Also, due to the incidence of payroll taxes, it may cause a tax increase for the middle class anyways. As most labour economists will tell you, labour supply is very inelastic. If a new payroll tax is introduced, decreasing workers' wages, most workers will simply continue to work the same amount of hours or only work slightly less. This means that this is an efficient revenue source... but the tax incidence falls almost entirely on workers.

Healthcare costs will always outpace GDP because of the Baumol effect. While a lot of progressive policies are fine on there own, collectively they can be very damaging. Countries like Sweden and the UK tried to implement these extensive policies in the 20th century and it failed. Things like transaction fees destroyed the Swedish stock exchange in the 80s and that was before high-frequency trading was really a thing. It took extensive neoliberal market reforms to get these countries back on track to being the desirable welfare states we know today.

4) M4A is no better than a public option. It could be argued that these downsides would be worth it if M4A was truly the best option we have, but this is clearly not the case. Multi-payer system, such as in Germany and Switzerland, routinely meet and exceed the performance of single-payer systems, such as the UK and Canada. 

M4A is simply not worth it, politically, fiscally, or electorally.

Thursday, September 19, 2019

Analysis: The Implicatons of a Wealth Tax in the U.S.

Public Finance, Inequality, Cash Flow

Empirically, broad wealth inequality has a potentially negative effect on economic growth. Countries where gaps between income and wealth narrow have much greater overall economic growth than countries with widening income gaps. The OECD finds that the large disparities in income can be associated with 10% reduced growth in Mexico and New Zealand, and up to 9% in the U.S. This is generally caused by the reduced educational outcome from the bottom 40% of earners, which we already knew.

Calls to address inequality have created discourse surrounding the economic implications of a wealth tax. Proponents of a wealth tax concede that it's not a pro-growth policy. Instead, they contend that reducing inequality and redistributing the benefits will be better for growth in the long run. While this may be somewhat true when factoring in other policy decisions, many arguments for a wealth tax are inconsistent with tax and public finance literature. In fact, it would be better and more attractive to abandon a wealth tax and favor taxing capital income and/or consumption. 

In the paper linked below, "a tax of t on wealth is revenue-equivalent to a tax of τ = (1+r )t/r imposed on capital income rW." (With a two percent rate of return, a 2 percent wealth tax is a 102 percent tax on capital income) If we want to analyze the analytical implications of a wealth tax, we can break down the rate of return and see what the literature suggests each tax on said return will do. 
r = normal rate of return + risk + rents

When most people think about inequality and power imbalances in society, they think about rents. They think about corporations deriving supernormal profits/extraordinary returns from extensive market power, rent-seeking, government protection of an industry, or a misrepresentation of income which one could view as unethical. The literature suggests that "a uniform capital income tax collects revenue at a high rate, (1+r)/r times higher than a wealth tax, from all these components." A wealth tax can produce the same amount of revenue, but it would be done so through taxing the principal. What does this mean? Choosing to use wealth relieves rents which are exactly what we're trying to tax, extraordinary returns. If you want to be less distortionary and focus on supernormal profits, you should favor a 20 percent capital income tax over a 2 percent wealth tax.

There are many ways we can utilize the current tax code to expose us to supernormal profits, but still be consistent with sound tax literature. For instance, you can deduct the investment from capital gains(thus reducing the burden on "savings") and then tax the return. This gives the IRS some exposure to supernormal returns while maintaining that the code is conducive towards investment, placing weight on the correct tax element, correcting the base, and not relieving pressure on rents. 

Does this tax logic sound attractive? It should! And you can apply this to the tax base in general. On the intensive margin, the tax base reduces normal returns. Lower after-tax returns reduce investment, productivity, wages, and economic growth. To address this, we want to exempt the normal return and focus on taxing cash flows and consumption. On the extensive margin, we focus on entrepreneurship, long-run dynamism, and tax competition.  What we want to do is minimize marginal tax rates on capital and limit average effective rates(tax burden) from rising above international norms and factor in incentives such as relations to the labor supply.

Thursday, September 5, 2019

Cost & Benefit Analysis: Inflation Targets

For the past two decades, monetary regimes have implicitly and explicitly targeted a low rate of inflation of ~2-4%. Targeting depreciation has led to criticisms as to why the monetary authorities are devaluing a nation's currency. However, people often fail to take into consideration to costs and benefits of different inflation targets.

Low Negative Inflation

Friedman was someone who actually argued that the optimal rate of inflation was negative. Spending cash has welfare benefits and, in theory, monetary policy should be used to maximize those benefits, i.e. reduce the cost of cash. In this case, the cost of cash in the nominal interest rate, which represents the risk-free rate of return. The real interest rate is determined by our advancements in technology, productivity, supply-side policies(which effect the previous two examples) and culture, and is positive in the long run. If real interest rates are positive, and nominal interest rates are zero, then the optimal inflation rate must be negative(to have a stable monetary policy/no tightness) since the real interest rate equals the nominal interest rate minus the inflation rate.  

Another POV: For every dollar, you have in cash or some account, you are foregoing buying a risk-free bond and earning interest on that bond that can be used to boost consumption and investment in the long run. That foregone interest is one cost of holding cash.

Assume that a bond earns a real return, r. The optimal rate of inflation that removes the difference between bond returns and cash returns sets inflation = -r. That is, the optimal rate of inflation is actually deflation at the rate of r% per year. At the deflation rate, you are no worse off holding cash than holding bonds. So, the central bank should aim for stable and gradual deflation, otherwise known as "The Friedman Rule".

Zero Inflation

In the news, you'll see a lot of people in the business/finance industry advocate for lower rates of inflation. The low cost of borrowing is one factor, but a concept is known as 'menu costs' is another. Firms face costs in changing their prices. When a firm changes the price it charges for its products, it just updates its online catalog, replaces the stickier prices on its shelves, etc. These costs are known as 'menu costs', the idea that you have to create a new 'menu' when you change the price of a good(in this case due to inflation changing prices annually). Menu costs are empirically quite large which can be a hassle for many firms. An ideal monetary regime would be one that targets an inflation rate of 0% to reduce menu costs. They would still change their prices relative to demand and shocks, but they won't have to worry about the constant and rapid change of price due to inflation. Targeting a non-zero rate of inflation also serves as a hassle due to the tax code. Inflation serves as a distortion on the real after-tax return on investment; minimizing these distortions guides us towards an optimal rate of 0%.  

Low Positive Inflation

It's not possible to reduce nominal interest significantly below zero(you can go a little), so in times of an economic downturn, if your rates are at zero you've given yourself less room to navigate during a recession. Now, the Fed doesn't actually run out of ammunition as it could simple, in theory, just buy as many assets as it wants, implement QE or invoke hefty measure by using 13.3(13.3 pertains to the U.S. in specific), but the political feasibility of doing these things may not be possible or they could be illegal -> see Japan. This is a phenomenon known as the Zero Lower Bound(ZLB). Suppose the normal inflation rate is 4% and the normal nominal interest rate is 6%. If we enter a recession, the central bank can cut interest rates by 600 basis points before approaching the ZLB. If the normal inflation rate is 2% and the normal nominal interest rate is 4%, then the central bank only 400 basis points worth of cuts before it hits the ZLB. If the normal inflation rate is 0% and the normal nominal interest rate is 2%, then the central bank can only cut interest rates by 200 basis points before hitting the ZLB. Given this information, a higher inflation target gives the central bank more room to stimulate during a recession given political feasibility as a factor as to why it wouldn't be able to stimulate by more 'extreme' means.

There's also something called the grease effect. Wages are very sticky downwards, if your boss cuts your salary despite you having done nothing "wrong", you would probably go into a frenzy. However, firms face business disruptions in both directions, so if a firm is underperforming in on year, it has no way to reduce costs short of firing people, which is bad for the firm, the employee, and the entire economy. Consequently, having some inflation gives all firms some flexibly, which creates some level of efficiency. 


Since it's nearly impossible for a central bank to do "whatever it wants" during a recession and since deflation, especially unexpected deflation, is dangerous and responsible for the worse economic downturns in history, such as the Great Depression, modern central banks have weighed all considerations and tend to target a slightly positive interest rate of 2-3%. Some people want it to be pushed up to 4% and others, like myself, would prefer a nominal GDP targeting schematic which would also have an implicit positive inflation target.

The key reasoning from a nominal GDP Target are due to 3 things main things

Countery-cyclical policy
Financial Market Efficiencey
and a stronger Phillips Curve

Sunday, August 18, 2019

On the Yield Curve Inversion and Fed Policy

It should be noted that yields have been falling ever since the 70s so you should always take that into account before looking at market data to try to 'predict a recession; which by the way, are not forecast-able. This year, people were paying attention to the 2/10 curve because it is the most liquid bond yields in the market. The 2/10 curve is the most popular in comparison with the other curves. Others, like myself and the NY and Cleveland Feds think it's the 3month/10year curve that is more important to watch and a much more reliable indicator of recession probability. Currently, the 2/10 and 3/10 curve are both inverted/flat which is giving people anxiety about an upcoming recession. However, people should treat this as the start of the 'worrying rather than a continuation of an increasing probability of a recession since the 3/10 curve inverting is a current phenomenon.

Despite this, I still don't think there's going to be a recession; although I still feel uncomfortable about our economic outlook and I wouldn't be surprised if one occurred. The credit spread is still the same as it was during 2017 and uncertainty is largely caused by trade uncertainties. Eyes should really be on the Fed to see how they react to the economy. If Fed policy becomes too tight, then we should worry about a recession. In response to trade uncertainties which usually puts downward pressure on the equilibrium rate, the Fed should do it's best to keep rates at the eqilibrium rate since adopting an expansionary policy in response to a supply side shock is ineffective. The last Fed rate cut was good in essence, but it should have be a .50 point base cut given how markets reacted. I expected another Fed rate cut, but I also hope that the Fed looks at it's hidden contractionary policy - interest rates on excess reserves. Central Banks don't run out of Ammo, but in terms of political feasibility it would be nice to see then try to stray away from not having much room and the Zero Lower Bound.

Wednesday, July 31, 2019

How do I know the natural rate is falling?

My previous two posts claimed that the Fed would be right to cut rates, because the natural rate is falling rapidly. Keeping rates steady would eventually cause the nominal rate to be too far above the natural rate, making monetary policy too tight. However, the natural rate isn't observable; so how can we infer what stance the Federal Reserve should take. Well, just as we learned in 08, we can look at market forecasts as a way to determine tightness. 

The TIPS spreads show weak inflation going forward, despite rapidly falling interest rates in the fed funds futures markets. This indicated that monetary policy was too tight.

Short term interest rates are too high. 10 year Treasury bonds were priced a by the market at 2%. A T-Bond shouldn't be 2.4%. The yield curve told us monetary policy was too tight.

The Fed has ways of estimated r-star when comparing it to market rates at growth, these tools told us that policy was too tight.

Low Productivity, Sluggish Immigration Policy and Trade Wars slows down global growth which puts downward pressure on the natural rate. This told us that monetary policy was too tight.

I almost ordered 10 dollar a slice Pizza while vising Universal in Florida and didn't because I'm not stupid and I didn't have the disposable cash. Money is too tight.

F.Y.I. The Fed should have slashed rates more than a quarter, but I expected a quarter and I expect one more slash. That's my prediction.

Modifying My Last Post on the Rate Cut

Slight Repost

The nominal rate is the rate set by the Fed and is used to influence economic outcomes. The natural rate is set by classic supply and demand forces in the market. Currently, the natural rate is falling rapidly; this means that if the Fed were to keep rate steady, or worse, raise rates, then monetary policy would be highly contractionary, it would be too tight. You cut rates, not to expand, but to avoid tightening. Think of it as the Fed really just keeping their rate the same. If you're thinking that interest rates are indicative of the stance of monetary policy this makes sense, but they're not. The cut is not expansionary, but to keep monetary policy steady. This is a great policy change from the fed and shows they're looking at market forecasts which could have made the recession less bad.

Short Version: Monetary policy would be too tight since the nominal rate, the rate set by the fed, would be way higher than the real rate, the one set by supply and demand forces in the market. This indicates super tight money, which we don't want. The nominal rate is set to influence the real rate to produce desirable outcomes.
We also know that low productivity, lower immigration and a trade war puts downward pressure on rates

Markets Expect and Want a Rate Cut

Cutting rates keeps monetary policy STEADY it's neither contractionary or expansionary right now. Interest rates are not a good indicator of the stance of monetary policy. A rate cut doesn't always need to happen in a recession and a hike doesn't always need to happen in an expansion

Sunday, July 28, 2019

Explaining The Possible Rate Cut

Powell is shaping up to be one of my favourite Fed Chairmen and if he continues to use market forecasts as a way to determine a stance on monetary policy he will certainly become my favourite one. Recent controversies surrounding the possible rate cut make it clear that people still aren't aware that interest rates aren't a good indicator of the stance on monetary policy, due to confounding variables such as the Fisher Effect and IOER. 

The nominal rate is the rate set by the Fed and is used to influence economic outcomes. The natural rate is set by classic supply and demand forces in the market. Currently, the natural rate is falling rapidly; this means that if the Fed were to keep rate steady, or worse, raise rates, then monetary policy would be highly contractionary, it would be too tight. You cut rates, not to expand, but to avoid tightening. Think of it as the Fed really just keeping their rate the same. If you're thinking that interest rates are indicative of the stance of monetary policy this makes sense, but they're not. The cut is not expansionary, but to keep monetary policy steady. This is a great policy change from the fed and shows they're looking at market forecasts which could have made the recession less bad.

Short Version: Monetary policy would be too tight since the nominal rate, the rate set by the fed, would be way higher than the real rate, the one set by supply and demand forces in the market. This indicates super tight money, which we don't want. The nominal rate is set to influence the real rate to produce desirable outcomes.

Thursday, June 13, 2019

The Monetary Implications of A Supply Side Shock

The Federal Reserve was and is instrumental to stabilising the economy counteracting periods of unexpected deflation. However, Trump's trade war, if extended, could cause one of the worst economic downturns in the United States. Not because it will rival magnitude of the Great Recession and Great Depression, but because the federal reserve can't counteract a negative supply shock. The Fed can only really effect demand side inflation so a supply side shock would be rendered ineffective. Instead of raising rates in response to a trade war, the Fed should aim to keep rates steady at the Wicksellian equilibrium rate. Since this natural rate is likely to fall during a trade war, the Fed should cut rates. However, this wouldn't actually have an impact on the nominal wages of the economy. Fiscal policy would be needed to counter to adverse effects of a trade war. It's unclear if Congress is in the political state to effectively do this.

Thursday, May 30, 2019

Is the UK switching to an NGDP monetary system?

The UK  Office of National Statistics has recently announced that they would publish monthly reports on current GDP levels in their economy. Any monetary regime that has an NGDP component won't make a big monetary difference in normal time, but for crises this can be crucial to avoiding situations such as the Great Depression. You can get much more information from a monthly GDP report which would ignore supply side inflation. This can be used as a tool for not accidentally contracting the money supply when nominal GDP is rapidly falling. In 08 monthly GDP reports from June to December would have shed light on the upcoming recessions and the Fed may if been able to ease the money supply sooner. It'll will be interesting to see this play out in the next economic downturn along with the increasing willingness for central banks to pursue quantitative easing.

Thursday, May 23, 2019

The Decline of Golf Courses Is A Win For YIMBY's

According to Pellucid Corporation, the golf course development boom began in the 90s and lasted for over a decade. However, since 2006 the golf course development industry has been in a sharp decline. Nearly 2,000 gold courses have close and only 557 have opened. This situation could be good for the lower middle class and the poor. As developers seize land we can expect the supply of housing to increase. In theory, allowing prices to float at market rates should reduce the price of housing. This situation is also politically sound since you don't have to worry about displacement and gentrification. NIMBY's may try to lobby against the increase of housing in favour of large luxury developments, but this should be a net good anyways. We'll see.

Wednesday, May 15, 2019

Fixing A Trade Deficit that Doesn't Matter

Let's take a scenario where Apple is on the verge of creating a new phone that would revolutionize the mobile industry. However, a part needed to complete the phone is very rare and necessitates a large number of resources to acquire. Apple can either choose to make a large investment and spend a large sum of money to acquire said part, or they can buy it on Amazon for 200$. Obviously, they buy it on Amazon. In this situation Apple has a trade deficit with Amazon - they have 0$ and gave away $200. But, obviously, Apple isn't operating at a loss since they've gained something they wanted (at a cheap cost) that will net them profits in the future. In this way, trade deficits don't truly matter, but some people appeal to the idea of being Amazon, or in a countries case, a large aggregate exporter of materials. If you were to ask me, I'd rather run a trade surplus, like Germany, but again, it doesn't matter. However, say you wanted to reduce the trade deficit. Like Trump, you could simply place tariffs on goods, but this only reduces the deficit if there is a lack of investment being caused by the tariff. 


If you were to frame the tariff as reducing the deficit by reducing investment it wouldn't sell as hard since we know that, in the long term, investments are the main source of not only economic growth, but the economic well-being of the overwhelming majority of a countries citizens especially those permeating the poverty line.

In the short run, how much stuff is made largely depends on demand - if stores sell all their goods they put on more workers and have people work overtime trying to get more sales. But not all businesses can do that at once for long. Eventually, workers become scarce, wages rise and businesses find it's no longer profitable to keep producing so much and the boom ends.

In the long run, the amount of stuff we can make depends on how clever we are, how good our technology is and how much capital (tools, machines, and buildings) we have. Investment (depending on how you define it) creates these things, increasing how much stuff society can make without having to work overtime. Tariffs reduce the propensity of this occurring and increase the chance of monopoly.

The government has negative savings right now, that is it's running a budget deficit. Perhaps, a better way to reduce the trade deficit is via reducing the national savings rate.  There are many ways to do this, decreasing the federal budget deficit may be one of them. Fully funding social security is another way. Basically, eliminate all disincentives to save and thus increasing America's marginal propensity to consume.

Note: It's fine to try and target certain industries and push back against China's predatory practices, but the understanding of trade, the relative randomness of tariffs, the pushback against deals like NAFTA and TPP only make China's influence stronger and show a lack of understanding of the economics behind free trade. It's fine to have a protectionist sentiment against China, but it's not fine to be protectionist.

Saturday, May 4, 2019

Update: Jobs Report

The current U3 rate of 3.6% is a good measure of a relatively strong labour market and a net number of 236k new jobs is good especially considering that a small percentage of the labour force makes minimum wage/around minimum wage. However, this rate is interesting given what U6 and prime-age EPOP numbers are saying(stagnant). There's also a dip in the LFPR, but that's mostly just noise considering we're still having good NGDP growth which makes me less wary of a minor dip.

All this considered, the job market is strong, but not as hot as U3 implies. (Given inflation and wage growth) I'd also like to add that the natural rate of unemployment is probably going to go down from the expected 4 percent to around 2-3. In my opinion, since society is more accepting of potential workers who may have a drug history or other racial/sexuality/gender factors, you'll probably see a lower natural rate. Investments into transportation and occupational licensing reform could reduce this rate further.

3.6% is a good number, but it's not the best in 20-50 years.  We probably shouldn't be expecting it too due to our changes in productivity and since we live in a low point of innovation.

Ironically trade, immigration, and capital flows could aid in helping wages, etc. But don't tell Trump and Bernie.

Wednesday, April 24, 2019

The Non-Existent Inflationary Effects of a UBI or NIT

During the economic downturn proceeding 08, the United States adopted fiscal stimulus in hopes of boosting the economy by increasing the money supply. However, the fiscal multiplier was mitigated due to a concept known as monetary offset. Because the Federal Reserve has a mandate of averaging inflation at about two percent, any attempt to shift fiscal stimulus is diluted by the central banks' strong control of the rate of money growth and rates. If fiscal stimulus were to be effective, it would be done by shifting the aggregate demand curve to the right. This would raise prices in the short and long run, and only raise output in the short run. However, in the real world, if the fiscal stimulus shifts the AD curve to the right the central bank must adopt a more contractionary monetary policy in order to prevent inflation from exceeding their 2 percent target. This contractionary monetary policy aides in shifting the AD curve back to the left, a concept, as I said, known as monetary offset.

We can use this knowledge to combat the idea that programs in the form of a UBI or NIT would result in a large amount of inflation. If the government printed money to pay for these programs, the central bank would offset the inflation by exogenously stabilizing it.

If the money were to be funded through taxation then inflation still would not increase. The taxation that pays for the basic income will mean that taxpayers will have less to spend. That will offset the fact that recipients of the basic income will have more to spend. In this scenario, no money is being created. That means there can be no inflation unless the rate at which money changes hand changes - the so-called velocity of money. It's not clear that it would and if it did the central bank would once again take care of it.

This doesn't mean that there would be no effect on prices. UBI/NIT may have an impact on the relative prices of a subset of goods and services, such as housing. That seems plausible because poor people have a larger marginal propensity to consume. Due to the income effect, we'd expect prices, like housing, to rise, but you wouldn't necessarily 'feel’ this in the long term.

Tuesday, April 23, 2019

The Implicit Regressivity of Warren's College Plan

Warren's college plan appeals to many students who view debt as an unwarranted burden - and rightfully so. However, the implicit regressivity of the plan has many unintended consequences. When looking at the housing market, we observe that wealthier landowners often lobby for rent control and zoning restrictions that drive up the cost of housing, lower the supply, and lead to less desirable outcomes for the majority of poor and working-class Americans. In this situation, the landowners are happy and their problem of having 'luxurious’ housing is met, but there are many unintended consequences. You can apply the same logic to Warrens forgiveness plan which may “fix” the acute problem, but leaves a lot of questions still unanswered.

Many students can afford to pay a considerable amount toward their higher education making it wasteful to give them a free ride. Most people in college are upper middle class to upper class so I'm not exactly sure why these people should be getting a subsidy. It's also known that subsidies that induce marginal students to attend college provide negligible benefits since it seems that such students are far more likely to drop out or become underemployed even with a four-year degree, implying minimum wage gains from a massive subsidy funded by taxpayers. Given these facts, it wouldn't be unreasonable to claim that the impact of a free college subsidy is a benefit that is captured by the upper and middle class, who were already receiving significant gains from their degrees and already had the financial means to pay for their degree. All the while, not many of the marginal students that can now attend due to “low tuition” are receiving benefits. The debt forgiveness section would reasonably be targeted if you cut the qualifying household incomes in half.

Probably the most overlooked flaw of that plan is that it's an implicit 33% marginal tax rate over the income range for affected individuals. At an income of $100,000(the phase-out threshold), you can get loan forgiveness of up to $50,000. At $250,000, you would get none. We can assume that this is a single year income and the phaseout occurs linearly(as implied.) If both these are true, then for each extra $3,000 that I earn above $100,000, I would lose $1,000 of debt forgiveness. Thus, a 33% marginal tax rate. Once you combine state and federal taxes, the effective marginal tax rate on income is in the range of 60-85%. Some individuals may take advantage of this by deferring the realization of capital gains, accelerating realizations of losses or by taking unpaid leave, etc, but most will not.

As I said before, I would support lowering the threshold, but I would couple the policy with other projects to make an effective long term solution relating to college costs. The main driver of high college prices has been the increase in college attendance, which is largely due to expanded college access she to loans. We greatly expanded the ability of people to go to college without appreciably increasing the number of institutions relative to the population - we created a demand above and demand overshot supply, and so the price rose. The primary method to combat this would be to expand the number of colleges, so that supply and demand fall back in line. However, this would take a long and since, due to college culture signaling, the demand is so high you would probably need a lot of colleges. To circumvent this problem, it would be efficient to couple the college expansion process with an expanded Income Shared Agreement that decreases the necessity for loans and makes the loan environment less sporadic and more controlled. This would act as a stabilizer for the market. We should also make community college and trade schools free for students who maintain decent grades, to lower the demand for 4-year colleges and incentive alternative routes towards “success”. This would aid in bringing down the supply and demand for a four-year college.

In an expanded ISA framework, an equity financier would agree to pay for your tuition up front for a particular class. In exchange, your promise to pay x% of your income to the financer for your first couple of years in the workforce. There's a case to be made for a cap so let's say around 10 years. Right now, ISA plans are limited so we should work on expanding them. We could increase the interest in income-based repayment plans for government-financed loans until the government expects to breakeven on the loans. Currently, the subsidies the government gives in debt financing makes ISAs uncompetitive. This has the added benefit of increasing the progressivity of education subsidies. Also, fund the IRS and make them handle repayments since they have the existing infrastructure in place(FICA taxes) that private actors do not.

Lastly, the vast majority of states have cut education funding so more of the burden was shifted from the taxpayer to the college student. Basically, on average, 80% of soaring college costs can be attributed to cuts in funding.

“In the median state, South Carolina, the decline in state appropriations explains 81 percent of the increase in tuition revenue. Only three states — Alaska, North Dakota, and Wyoming — have kept funding for higher education on pace with inflation and enrollment growth (represented by negative numbers in the table). In 17 states, the price of college would have actually declined since 2000 (states with a share greater than 100 percent in the table) if funding had been kept constant and the schools applied for that money entirely to students’ tuition bills. While state funding has rebounded somewhat during the economic recovery following the Great Recession, most states’ increases have not kept pace with enrollment growth."

Sunday, March 24, 2019

Thoughts on the Trump-Russia Investigation

It's rare that I'll comment on something purely political and not economic, but I feel like it's warranted in this situation.

First and foremost, I've never been a believer that Trump actively and knowingly colluded with the Russians, but that doesn't mean I'm still right until we see the full report and his 12 other ongoing investigations are complete.

Note: I made my prediction based off of the 'Foundation of Geopolitics’, a book that details how the Kremlin should operate during the era of globalization and technology and how it should spread its geopolitical influence.

The Trump campaign still looks exceedingly dubious despite Barr's report and it's still worth noting that Barr was nominated in an attempt to serve Trump. Trump had fired Jeff Sessions due to him not being able to defend him because he had recused himself from the investigation. Trump replaced him with someone who was willing to do so. It's also worth noting that Barr has written numerous legal documents about defending the executive branch. Let's also not forget his firing of James Coney which cannot clear him of the obstruction charge.

We know Manafort gave 75 pages of internal polling data to Konstantin Kilimnik that allowed Russian to target voters with accuracy that would have not been legally possible. The special counsel could believe that the data was shared without knowledge that it was Russian intelligence and therefore wasn't collusion. Sharing data privately isn't an issue - it's shared amongst many private entities for the purpose of influencing elections, that's just a liberal democracy at work - but if it was knowingly shared with Russian intelligence that would stir legal action.

As far as we're concerned, the bar for intending to commit criminal conspiracy against the U.S. has not been met, but it's still obvious that the Trump campaign was littered with corruption from top to bottom. It's borderline undeniable that he was aware of the Russian interference and tacitly accepts it even if he didn't personally coordinate it. We also know that he has some shady business dealings with Russia that would have been gross ethics violations for any other person running for office. Had this information been permeating Hillary Clinton pre-2016 election, she would have been demonized even further by the right-wing and progressive blocs of the U.S. political spectrum.

State level investigations(he's probably screwed when he's out of office if he dares ever enter NY), show that virtually every company enterprise associated with him deserves to be shut down.

One of the most interesting cases would appear to be General Flynn who pretty much pleadled guilty to lying and admitted to collusion. Was he lying to get closer with Mueller or was he actually guilty?

The underlying question still remains… how direct is Trump's involvement? We know that Russia did get information through the Trump campaign, but how much did Trump and the people working under him know? Let's not forget the secret meetings with Trump, the Trump tower meeting, the lifting of sanctions and various other shady events.

Before the acceleration of the investigation, I thought it was much more beneficial for Russia to attempt to collude with Trump but knowingly fail. There would be enough material to further divide the American public and decrease America's global influence. It appears that I was right, as per right now, but I didn't expect this amount of evidence to be accumulated. It truly does seem as though there is a missing link that people are still trying to find, but many Russia is just better at their job than I thought they would be.

Note: The reason I made this prediction is because if Russia really did directly collude with Trump and Mueller found out then Trump's indictment could be used as a way to unify the public thus backfiring on the Kremlin's goal.

None of this matters until we see the full report.


Saturday, March 23, 2019

Short Take: Rates Aren't Indicative of Stance of Monetary Policy

There's a massive misconception that low-interest rates indicate that a central bank is pursuing easy money. In fact, there's a bigger misconception that interest rates, in general, indicate a monetary authority's stance on monetary policy.

Let's say you had a rate of inflation of about 7% and real interest rate of about 3%. This would give you a nominal rate of about 10%. Let's assume you want to reduce the inflation rate because the economy is overheating beyond maximum capacity and the deficit is high. You would, in consequence, reduce the growth rate of the money supply by raising the interest rate (let's say by one percent). In the short term, this increases your nominal rate to about 11% making the real interest rate about 4%.

However, in the long run, inflation goes down. Let's say the inflation rate becomes 4%. The central bank stabilizes the economy so that the real rate is back at 3%. This would give a nominal rate of about 7% which would be lower than your initial nominal rate.

In this example, tight money has led to low rates in the long term. Low-interest rates usually correspond with an increase in the money supply and high-interest rates correspond with a decrease. However, in a real-world setting, low and high-interest rates are not indicative of the current stance of monetary policy. Via the liquidity effect, tight money leads to high rates in the short run. Via the fisher and income effects, tight money leads to low rates in the long run.

Saturday, March 16, 2019

Short Take: Creating welfare with MMT reduces welfare

Currently, there is no real danger of U.S. deficit spiraling out of control. Despite this, deficits absolutely do matter. One possibility of higher deficits is that it can lead to higher taxes in the future, though this depends on how real interest rates evolve over time. Olivier Blanchard recently did work on this topic. Blanchard's conclusion was that this likely won't happen since(arguably) real interest rates in debt will remain below GDP growth rates. This is the baseline of an MMT argument, however, I never said that bad things couldn't happen.

MMT advocates do recognize the counter-cyclical view that deficit spending could lead to higher inflation once the economy overheats and expands beyond "maximum capacity". If inflation were to rise, MMT advocates say you should raise taxes to hold down inflation (although they don't think of inflation as a problem right now). This, once again, is a true statement. However, the MMT view of constantly spending and monetizing debt would not only lead to high deficits and inflation but as they said, higher taxes. It could even lead to hyperinflation. Because of this risk, the Fed will likely continue targeting it's mandates and refuse to monetize the debt. If this is true, then the burden of deficit spending will fall on future taxpayers, because fiscal policy would be the last resort in the absence of a monetary one. The increase of taxes would lead to slower economic growth and the decrease in overall income would lead to less welfare for people even though the intent of MMT would be to fund welfare programs. If this isn't bad enough, higher interest rates would crowd out private investments and capital accumulation which would also hurt the economy.

Keynes said that in the long run, we're all dead. MMT says, "Well what are we waiting for?"

Wednesday, March 13, 2019

Tax Cuts did boost GDP, so what?

Trump's tax cuts directly led to an increase in consumption. We can use many methods to help look at a countries growth such as using a Solow or DSGE model, but at the most basic level, growth, in the form of GDP is calculated by the addition of consumption, investments, net exports and government expenditure. A tax cut, putting more money in peoples pockets, directly leads to an increase in consumption which will increase the GDP. However, that DOES NOT MATTER. As an individual variable, consumption only accounts for short-term growth. In fact, it can even slow down an economy in the long term which I'll get into later. Investments and Trade are the sources of long term growth.

So why?

In the short run, how much stuff is made largely depends on demand - if stores sell all their goods they put on more workers and have people work overtime trying to get more sales.
But not all businesses can do that at once for long. Eventually workers become scarce, wages rise and businesses find it's no longer profitable to keep producing so much and the boom ends.

In the long run, the amount of stuff we can make depends on how clever we are, how good our technology is and how much capital (tools, machines and buildings) we have. Investment (depending on how you define it) creates these things, increasing how much stuff society can make without having to work overtime.

Tax cuts (that are not immediately financed by equal spending cuts), will likely lead to slower economic growth in the long term. Simple GDP accounting implies that holding all other things constant, tax cuts will result in an increased government budget deficit, which will reduce national saving and raise interest rates. This will crowd out private investment and, in the long-term, reduce economic growth. Why is this the case? Government budget deficits are financed by borrowing (through sale of government bonds). Additional government borrowing reduces the supply of loanable funds available in the financial system. This will raise interest rates, and reduce private investment.

In the short run, tax cuts increase demand and increase GDP in the short run (especially if the economy is in a recession).

Saturday, March 2, 2019

Gold and Depression

The Great Depression is and will always be a monetary phenomena. Monetary policy caused it, ended it, but didn't decrease unemployment down to frictional levels. Herbert Hoover, who was president during the initial phase of the depression, fervently stuck with the gold standard and defended the policy of sound money which only exacerbated the economic downturn. Many countries started to recover in the mid 1930's when they dropped the gold standard - allowing a greater expansion of monetary policy. Economists and historians find that the sooner a country dropped the gold standard, the sooner they recovered.

In his article and book "The Midas Parodox", Scott Sumner describes the impact of the international gold market on monetary policy as:

P * Y = P_g * g_s / (r * m_d)

Where P is the price level, Y is output, P_g is the nominal price of gold, g_s is the monetary gold stock, r is the gold-reserve ratio, and m_d is the quantity of money demanded by market actors.

We can view P*Y as a collection of income and expenditures, or, simply, NGDP. P_g is exgenously chosen by government. r is mostly determines by the central bank and P_g is endogenous. The monetary gold stock is the quantity of gold held by the central bank in vaults. The non-monetary gold stock is the quantity of gold held in the private sector. m_d can be influenced by many things, but if market actors want to hold more money then they will bid up the price of money, which is defined as 1/(P*Y).

During the Depression, we saw Shocks to all those variables that lead to an increase in P and a decrease in Y. There was also a massive amount of gold hoarding. The US and, especially, the French central banks were also increasing their gold reserve ratios by simply our basing more gold and also by increasing reserve requirements. We can infer that m_d was rising as well, but it's harder to do this in quantitative terms due to data limitations. Generally, m_d tends to be inversely proportional to money velocity, but that relation doesn't ways hold. Finally, the various labor market interventions during the second new deal led to an increase in P. In order to cancel out the effect of all changes,  Y must decline - which means a recession is happening.

What finally got us out of the Great Depression, in terms of GDP which is appropriate for a manufacturing/industrializing economy, was an increase in P_g when FDR re-pegged the gold to US dollar exchange rate. I said in terms of GDP on purpose, because although GDP was returning to normal levels, the unemployment rate was still staggeringly high. This is where, what is called a "natural test", of quasi-keynesian economics comes into play. 

Keynesian economics is the argument that the amount of total spending in the economy can affect the amount of economic activity in the country. e.g. if the government decides to buy more stuff that month, more will be produced.(Fiscal Multiplier)

What eradicated all traces of the Great Depression ( the unemployment side), was an increase in military spending during World War II,  that acted as a stimulus for the economy.