The Fact of My Ignorance » GDP

Vanuatu: Third World, but a Whole Lot Happier than Us

Ryan — Fri, 10 Apr 2009 05:56:41 +0000

In 2006, the NEF (New Economics Foundation) released the results of a comprehensive study they’d done on happiness in various countries in the form of the Happy Planet Index. The goal was to find a way to measure the success of a society other than things like GDP or HDI. Its a little simplistic to call the index a measure of happiness since its really intended to be a measure of a society’s capability to sustain and produce a happy populace. Which is more different than you might think. For those that are interested the Wikipedia page on the HPI discusses it pretty thoroughly.

Anyway, Vanuatu came out on top all things considered. In fact the top ten are nearly all third-world countries. But this isn’t too surprising to those who have spent time in a third-world country, since it doesn’t take long to realize that financial success ≠ societal happiness. I bring this up now because Mental_Floss posted a great article the other day about one author’s travels to Vanuatu in an attempt to find out how they made it to the top of the list. His observations are pretty interesting I think, and they remind me a lot of Ghana. Here’s a link to the article:

Vanuatu: The Happiest Place on Earth? | Mental_Floss

I’m not going to launch into any kind of analysis of why these people are happier, but feel free to leave your thoughts about the issue in the comments. Also, if you’d like to see the rank that the US ended up with on the “Happiness Index” out of 178 countries examined, just click “continue reading”…

150th. Right below Lithuania. But were you expecting anything different?

Sphere: Related Content

No related posts.

Obama’s 2/24 Press Conference: “We Will Recover”

Ryan — Wed, 25 Mar 2009 05:33:35 +0000

Visit msnbc.com for Breaking News, World News, and News about the Economy

Just a few comments on President Obama’s press conference tonight, it will be quick because I’ve got a lot to study. I’ve got the whole thing posted at the end of this article but I wanted to highlight this clip where he addresses issues surrounding his proposed budget. Its short, and if you’re concerned at all about the 3.6 trillion budget the administration recently proposed its a good one to watch.

I’m probably going to do a larger post about the budget at a later date but I think he does a great job of hitting some of the common concerns head on. One thing he talks about is that, like with the stimulus plan and the bank bailout, we have to remember that it’s not a choice between increasing the deficit and not increasing the deficit! The deficit will increase over the next several years. Its a matter of choosing the path that will increase it the least. And we also have to remember that a slow-growing, or shrinking, economy reduces government inflows and increases our deficit significantly. The idea is to boost spending in ways that will stimulate the economy such that it offsets the costs of that spending.

So I don’t think we can just say, “why don’t we spend less to decrease the deficit?” Cutting valuable spending will likely increase the deficit over the long term. We need to look specifically at the various spending proposals and decide which projects provide more benefit than they cost, and which ones don’t. That is what I think we should be debating. I haven’t combed through the budget yet and I can’t say whether each or any of the new spending proposals are worth it or not, but I just thought it was important to point out that the outrage many people feel about the impending deficit increases may be somewhat misdirected.

Of course we know that the budget is at least reasonably well put together because it decreases the projected deficit. Everyone’s all up in arms at the CBO’s projected 9.7 trillion increase in the deficit over the next 10 years (and that is quite a scary thing), but remember that Obama inherited a 1.2 trillion yearly deficit from the previous administration. Meaning if his tax and spending proposals were exactly as successful as Bush’s we’d see an increase in the deficit of 12 trillion over the next 10 years. So the budget that this administration has proposed seems to be an improvement.

Also, I’m still looking for independent verification of this but in this clip Obama says that his budget calls for less non-defense discretionary spending as a percent of GDP than any budget since the 60′s. If that’s true its fairly impressive, and it tells us that it’s not an increase in spending that’s causing these deficits, it’s more likely the tax cuts that the budget calls for. But of course you don’t see many people getting all bent out of shape about there being too many tax cuts. Though considering the questionable value of tax cuts in our current recession (see The Trouble With Tax Cuts) maybe they should be.

Still, the deficit projections are very troubling. I think its unlikely that all the elements of the budget as it currently stands are worth it. I think more attention needs to be devoted to trimming those things out. We need to keep spending programs that will pay for themselves in the near and medium term but perhaps the programs with only very long term returns may need to be forestalled. And some projects which seem to be designed more for correcting societal ills or increasing social justice, while they may be worthy efforts, may also need to be put off. I hope the budget can be modified as it makes its way through congress such that it can lessen the severity of our deficit growth projections while maintaining those worthwhile efforts that will pay for themselves. Stimulus isn’t our only priority right now, but I recognize the deficit needs to take a little bit of a back seat at the moment. Still, addressing our ballooning deficit should be our next priority once the economy is on more solid footing, and we don’t want to make that task any more challenging than its already going to be.

Anyway, as promised, here’s the full press conference for those who are interested.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Sphere: Related Content

No related posts.

The Trouble with Tax Cuts

Ryan — Wed, 11 Mar 2009 04:34:33 +0000

Well I’ve had several questions lately about a statement I made in my post CA Obstructionism and Political Games in which I was pretty dismissive of tax cuts in the stimulus bill. All the questions came via email of course (this is what the commenting system is for guys! You can comment anonymously if you want!). Anyway, while I’m planning on writing a much larger treatise on tax policy at some later date, I thought I’d address why I think tax cuts provide for relatively little stimulus. I’m going to try to keep it as non-technical and conversational as possible. And I should note before I begin that the principles I’ll present in this post are not universally agreed upon in the field of economics, but they are reflective of the economic philosophies that seem most reasonable to me given my educational experiences, and the views that are most widely held among economists today. So with that, lets just jump right in, this is the trouble with tax cuts as far as I can tell…

So while I’m going to try to minimize jargon here I’ll have to define one term right at the start, and that’s the “Spending multiplier”. When you spend a dollar, it actually adds more than a dollar to the economy. Because that dollar ends up in the pocket of an employee who uses it to pay his rent, whose landlord uses it to buy some groceries, etc etc. The longer this cycle goes, the more impactful that dollar has been. And money spent in different ways will multiply at different rates depending on the propensity for that spending method to lead to a cycle like the one described above. So the spending multiplier is a number that essentially tells us the real GDP increase that one dollar of injected cash will create when spent in a particular way. So in a stimulus plan, you want to inject as much money as is feasible at the highest spending multiplier possible, so as to increase GDP as much as you can, counteracting our current recession.

So when money is returned to an average person via tax cuts, where does it go? Well a lot of it is saved. In fact Nobel Prize winning economist Joseph Stiglitz calculated that less than half of the tax rebates of 2008 were spent in the first 9 months, the rest being saved. And several things affect this savings rate. For example when the populace is in an unusual amount of debt, they save a larger percentage of their tax cut. When there is a lot of uncertainty about the future of the economy or if its expected to decline, they save a larger percentage of their tax cut. Its also important to note that the rich save a much larger percentage of their tax cuts than the poor, since they require a smaller percentage of their income to pay for basic necessities.

So if we give a dollar in tax cuts, lets say 40 cents right off the bat is put into savings and not sent out to be part of the “cycle of spending” (this is probably a low estimate in today’s economic climate. Also note that this number would be much higher for the rich and much lower for the poor). Then of that money spent, a fair portion of it will be spent on foreign products (lets say 40 percent of that – again probably a low estimate) which will go to stimulate that country’s economy and not our own. So that leaves us with 1*.6*.6 or 36 cents of each dollar of tax cuts that actually goes out into the American economy and is subject to the normal cycle of spending. This leaves tax cuts with a pretty miniscule spending multiplier.

And of that 36 cents spent, most of it will likely go to credit card companies, grocery stores, and the consumer electronics industries. Not exactly the industries that most need stimulating right now, and not the industries which are most likely to create more valuable jobs as a result of their income growth. If only there was a way we could have a tax cut in which all of the returned money was spent, all of the money went to American companies, and most of the money was spent in industries that need it the most. Well we have something like that, its called government spending.

When the government spends a dollar, none of it is saved, all of it goes to American companies, and we the people (through our elected leaders) can send it to the industries that need it most. For these reasons, it seems to me that when economic stimulus is your goal, government spending works far better and more efficiently than tax cuts. Mark Zandi, chief economist for Moody’s Economy.com testified before congress last summer in favor of a stimulus bill and cited these numbers as the calculated spending multiplier for various stimulus options:

Fiscal Bang for the Buck

Source: Moody’s Economy.com

One-year $ change in real GDP per $ reduction in federal tax revenue or increase in spending (ie spending multiplier)

Tax Cuts

Nonrefundable Lump-Sum Tax Rebate————————–1.02

Refundable Lump-Sum Tax Rebate——————————1.26

Temporary Tax Cuts

Payroll Tax Holiday———————————————–1.29

Across the Board Tax Cut—————————————–1.03

Accelerated Depreciation—————————————–0.27

Permanent Tax Cuts

Extend Alternative Minimum Tax Patch————————0.48

Make Bush Income Tax Cuts Permanent————————0.29

Make Dividend and Capital Gains Tax Cuts Permanent——-0.37

Cut Corporate Tax Rate——————————————-0.30

Spending Increases

Extend Unemployment Insurance Benefits———————1.64

Temporarily Increase Food Stamps——————————1.73

Issue General Aid to State Governments————————-1.36

Increase Infrastructure Spending ——————————–1.59

As we can see from this chart two of the very worst methods for stimulating the economy are cutting the corporate tax rate, and making the Bush income tax cuts permanent, two options that have been pushed heavily by some legislators. Indeed, most of the tax cut options have a spending multiplier of less than one. So in the instance of the bush tax cuts, of every $100,000 returned through those tax cut programs, $70,000 is basically thrown into a pit as far as the economy is concerned. This is, in part, because the Bush tax cuts were heavily tilted towards the rich who, as we’ve discussed, save a much larger percentage of their income. None of this should be a huge surprise since cutting taxes for the rich and big businesses is what we’ve been doing for the last several years, and we’re now in a very sticky situation.

Another interesting thing to note is that one of the most valuable forms of “cutting taxes” is the refundable lump-sum tax rebate, which is used in the recently passed stimulus and which was criticized pretty heavily by pundits. Also notable is that the various methods of spending increases all provide GDP growth that’s greater than their dollar value. They also have plenty of non-monetary benefits. Increasing infrastructure spending, for example, creates jobs and tangible assets (like schools, hospitals, public transportation systems) that will benefit the country for decades.

Of course some people are against government spending for stimulus purposes because they worry about the deficit it would create. Well I don’t have time to detail the mechanism now but from the numbers listed above we should be able to see that 100 billion in tax cuts will lead to a far greater national deficit than 100 billion of government spending, because the spending will lead to greater GDP growth and larger government receipts, offsetting at least some of the outflows. Once again, this shouldn’t be a huge surprise considering the deficits we’ve posted the last few years.

We should also remember that if we hadn’t enacted a stimulus plan, and instead attempted to allow the economy to self correct, the recession would have undoubtedly been longer and deeper. This would lead to a shrunken GDP, which leads to lower Government income, which leads to higher yearly deficits. So like the bank bailout, the stimulus plan is not a sacrificing of the national debt for expediency, it is an attempt to minimize growth of the national debt over the long term. The idea is that 800 billion spent now, will prevent a net loss to the government of far more than 800 billion over the next several years. So its intended to be the path that leads to the smallest growth in national debt, while simultaneously decreasing the economic burden on Americans over the short term, and building infrastructure that will increase jobs and GDP over the long-term.

So that’s the trouble with tax cuts.

Sphere: Related Content

No related posts.