Month: October 2012

How Much Federal Debt Does the Fed Own?

The fine folks at FRED, the economic data service of the St. Louis Fed, recently added seven new data series showing how various measures of federal debt compare to the economy as a whole, as measured by GDP.

I particularly enjoyed this one, showing the federal debt owned by the Federal Reserve banks.

Quantitative easing gets all the press these days and understandably so given the recent spike in Fed ownership of Treasuries, now equivalent to almost 11 percent of annual GDP. But the chart also reminds us of that brief period early in the financial crisis when the Fed sold lots of Treasuries so it could make loans and buy other assets.

P.S. Anyone know how to get the FRED graph’s vertical axis to start at 0?

Shortfin Mako

I probably ought to be blogging about the latest GDP data or how Twitter taught McDonald’s about the Congressional Budget Office (here and here; Mickey D’s is promoting its Cheddar Bacon Onion). But the heck with that. Instead, let’s celebrate Friday with this stunning photo of a shortfin mako by Sam Cahir as published in the Mail Online (ht: Rick MacPherson):

What a beautiful creature (click to enlarge).

At this point, I usually would encourage you to read the accompanying article. In this case, though, caveat lector – parts are incredibly overwrought. But the other photos are lovely, including one of the mako with a great white.

When Economists Run for President

In real life, economists never get elected president (sorry Larry Kotlikoff), probably with good reason.

In fiction, though, our odds are better. Jed Barlett is one of the most popular presidents ever, and a Nobel Laurate to boot.

And now the Planet Money team is offering up a new, faux candidate for 2012. His six-point plan for getting America going again — built on the suggestions of a diverse group of well-known economists — is five parts tax reform (repeal the mortgage interest deduction, repeal the tax benefit for employer-provided health insurance, eliminate the corporate income tax, institute a carbon tax, tax consumption not saving) and one part marijuana legalization.

Here’s his first campaign ad:

I don’t think President Obama, Governor Romney, or even Governor Johnson have much to fear.

How Much Money Can You Raise by Capping Deductions?

Governor Romney has proposed roughly $5 trillion in tax cuts, but he doesn’t want to reduce overall tax revenues. He hopes to generate some revenue by boosting the economy, but even if that works, he will need trillions of dollars of “base broadeners” — i.e., offsetting tax increases. Like most politicians, he’s been vague about what those base broadeners might be. But in the past few weeks, he has discussed the idea of capping the amount of itemized deductions taxpayers can take, perhaps to $17,000, $25,000, or $50,000.

How much revenue could you raise by doing this? My colleagues at the Tax Policy Center just released some estimates of this. As noted by Bob Williams:

Eliminating all itemized deductions would yield about $2 trillion of additional revenue over ten years if we cut all rates by 20 percent and eliminate the AMT [DM: two key aspects of Romney’s tax proposal]. Capping deductions would generate less additional revenue, and the higher the cap, the smaller the gain. Limiting deductions to $17,000 would increase revenues by nearly $1.7 trillion over ten years. A $25,000 cap would yield roughly $1.3 trillion and a $50,000 cap would raise only about $760 billion.

Capping itemized deductions at $25,000 would thus produce about one-quarter of the revenue needed to offset Governor Romney’s tax cuts, and completely eliminating them (which he has not suggested) would cover about 40% of the revenue needed.

As you might expect, high caps are quite progressive, i.e., they:

[I]mpose proportionally more of the tax increase on higher-income households, as new TPC estimates show. With tax rates 20 percent below today’s rates, about 83 percent of the revenue gain in 2015 from a $17,000 cap would fall on the top quintile and about 40 percent on the top 1 percent. Raising the cap to $25,000 would boost those shares to nearly 90 percent on the top quintile and fully half on the top 1 percent. A $50,000 cap would virtually exempt the bottom four quintiles from higher taxes: less than 4 percent of the tax increase would fall on them, while nearly 80 percent would hit the top 1 percent. (Phasing down the caps at high-income levels [DM: which Romney has mentioned as a possibility] would, of course, concentrate the revenue gains even more at the high end, but how much would depend on the details.)

More here.

Shapley and Roth Get the Nobel Prize for Economic Engineering

A much-deserved Nobel prize today for Lloyd Shapley and Alvin Roth for their theoretical and practical work on designing markets. In particular, matching markets where you don’t have prices to help you.

The Royal Swedish Academy of Science released a very readable account of their contributions here. Here’s the introduction:

This year’s Prize to Lloyd Shapley and Alvin Roth extends from abstract theory developed in the 1960s, over empirical work in the 1980s, to ongoing efforts to find practical solutions to real-world problems. Examples include the assignment of new doctors to hospitals, students to schools, and human organs for transplant to recipients. Lloyd Shapley made the early theoretical contributions, which were unexpectedly adopted two decades later when Alvin Roth investigated the market for U.S. doctors. His findings generated further analytical developments, as well as practical design of market institutions.

Traditional economic analysis studies markets where prices adjust so that supply equals demand. Both theory and practice show that markets function well in many cases. But in some situations, the standard market mechanism encounters problems, and there are cases where prices cannot be used at all to allocate resources. For example, many schools and universities are prevented from charging tuition fees and, in the case of human organs for transplants, monetary payments are ruled out on ethical grounds. Yet, in these – and many other – cases, an allocation has to be made. How do such processes actually work, and when is the outcome efficient?

Along with his colleague David Gale, Shapley provided theoretical answers to these questions based on the idea of finding stable allocations (i.e., allocations in which no one would later have an incentive to change their mind). Roth then studied how those answers apply in real markets, e.g., designing algorithms to match doctors to hospitals.

Roth also blogs at the aptly-named Market Design. What did he write about yesterday? How Nobel Prizes correlate with chocolate consumption.

P.S. For a moving example of how well-designed matching markets improve human lives, see this post about kidney exchanges.

Five Things You Should Know about Mitt Romney’s “$5 Trillion Tax Cut”

You’ve probably heard claims that Mitt Romney wants to cut taxes by $5 trillion. Here are five things you should know about that figure:

1. $5 trillion is the gross amount of tax cuts he has proposed, not the net impact of all his intended tax reforms.

Governor Romney has been very specific about the taxes he would cut. Most notably, he would reduce today’s individual income tax rates by one-fifth (so the 10 percent bracket would fall to 8 percent, the 35 percent to 28 percent, etc.) and reduce the corporate income tax rate from 35 percent to 25 percent. In addition, he would eliminate the alternative minimum tax (AMT), the estate tax, the taxes created in 2010’s health reform act, and taxes on capital gains, dividends, and interest for incomes up to $200,000 ($100,000 for singles). The $5 trillion figure reflects the revenue impact of all those cuts.

But Romney has also said that he intends his reforms to be revenue-neutral, with the specified revenue losses being offset by a combination of economic growth and unspecified cuts in deductions and other tax preferences. The net impact of his reforms would undoubtedly be less than $5 trillion, perhaps much less if he’s aggressive in going after tax breaks or willing to compromise on some of his other tax reform goals (e.g., not raising taxes on investment income). Without any details about what he would do, however, we can’t measure the net revenue impact of his ideas.

2. $5 trillion is a 10-year extrapolation from a TPC estimate for 2015.

TPC has estimated that the gross tax cuts proposed by Romney would amount to $456 billion in 2015. Budget debates in Washington often focus on ten-year periods, so commentators have coalesced around a natural, if imprecise, extrapolation: multiply by 10 and round up because of a growing economy. Result: $5 trillion over ten years.

3. $5 trillion does not include the impact of permanently extending many expiring tax cuts, including those from 2001 and 2003.

In budget parlance, the $5 trillion is measured against a current policy baseline, not a current law one. TPC’s current policy baseline assumes that many expiring tax cuts, including the 2001 and 2003 cuts, the AMT patch, the current version of the estate tax, and the tax credits enacted or expanded in 2009 will all be extended permanently. Romney proposes to extend all of these except the 2009 credits. Because it is measured against current policy, the $5 trillion figure does not include the revenue impact of any of those extensions (but does include a small revenue increase from expiration of the credits).

The current law baseline assumes all tax cuts expire as scheduled yielding almost $5 trillion more revenue than does current policy. Relative to current law, Romney’s tax proposal would thus be roughly a $10 trillion gross tax cut. (The same issue arises with President Obama’s tax proposals, which we estimate amount to a $2.1 trillion net tax increase relative to current policy, but a $2.8 trillion net tax cut relative to current law.)

4. $5 trillion includes more than $1 trillion in gross tax cuts for families earning $200,000 or less.

Governor Romney’s specified tax cuts would go primarily to high-income taxpayers for a simple reason: they pay a large share of taxes and thus get a large benefit from a proportional reduction in tax rates. But that doesn’t mean that all the tax cuts go to top earners. Middle- and upper-middle income taxpayers would also get a gross tax reduction because of the reduction in tax rates, the elimination of taxes on capital gains, dividends, and interest for low and middle incomes, and, for some, the elimination of the AMT. Those gross tax cuts amount to more than $1 trillion over ten years.

5. $5 trillion includes around $1 trillion in gross tax cuts for corporations.

Cutting the corporate income tax rate from 35 percent to 25 percent would lower corporate tax revenues by roughly $1 trillion over the next decade. Little-discussed in the current debate is whether and how Governor Romney would offset this revenue loss.

As he has rightly noted, corporate taxes are ultimately borne by people, including workers and shareholders. Most of the corporate rate reductions would ultimately benefit high-income taxpayers since they own more investment assets and earn higher labor income. But about two-fifths of the benefit would go to low-, middle-, and upper-middle income workers and investors.

Bottom line: Governor Romney has proposed about $5 trillion in specific, gross tax cuts over the next decade relative to current policy, most but not all of which would go to high-income taxpayers. He has also promised to offset a substantial portion of those cuts—presumably in the trillions of dollars—by reducing deductions and other tax breaks, primarily for high-income households. Lacking any specifics, however, we can’t know what net tax cut, if any, he proposes.

Swedish Lessons for EU Bank Owners

Sweden is rightly admired for the way it handled its banking crisis in the early 1990s (and its ensuing fiscal challenges).

In yesterday’s Financial Times, Dag Detter looks back for some lessons for Europe as it struggles to resolve its current banking crisis:

When the Swedish banking system crashed in 1992, the government faced an  identical problem. Yet in the end, Sweden’s taxpayers came very well out of  their experience of bank ownership. How was this achieved, and what lessons can  be learnt for Madrid and the EU’s new bank resolution policy?

First, move fast. Spain and bankers have  been in denial about the scale of bad lending for too long. The Rajoy  government rightly came to office this year on a promise to force banks to write  down bad loans. The situation has predictably turned out to be much worse than  assumed, but their policy is the right one. Painful as it is, transparency on  the scale of bad debt is vital for the market to be confident that it  understands risk and uncertainty  in Spain and can therefore price it properly.

Catharsis can come only with a purge of bad assets. Banks should present  plans to handle problem assets, strengthen controls and improve efficiency. This  might require government or even supranational assistance in the orderly closure  of moribund institutions. In addition, “bad” bank parts must be demerged from  the “healthy” to facilitate recapitalisation. The state should never be left  holding the junk while the healthy part of a bank wriggles free.

Second, maintain commercial principles. In Sweden, each state bank investment  was made on what would have been commercial terms in a normal market, always  with the aim of maintaining competitive neutrality. The terms of the investment  must be structured in a way that gives the bank and its owners no grounds to  request more state funding than is necessary, combined with the incentives to  facilitate a swift exit. Yet it must be sufficient to ensure that the bank can  return to profitability without additional government assistance.

The whole piece is worth a read.