214 Comments
Mar 21, 2023Liked by Simon Bazelon

So then maybe DEFINITELY don't do "inflation relief payments" like some state governments did? Can we all agree those were one of the worst policy ideas ever?

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author

Bad economics, good politics.

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Yeah a pretty solid example of why I find POLICY interesting but POLITICS infuriating.

I want to love democracy, and I know other forms of govt are worse, but the voters are just the worst.

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author

“Democracy is the worst form of government – except for all the others that have been tried.” -Churchill

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the voters are better than caligula or even Louis XIV

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Simpsons did it--twice!

--After a rider for "the perveted arts" got tacked onto a bill: https://www.youtube.com/watch?v=kWdfRRtAs3o

--After a Proposition 187-style anti-immigrant bill passes resoundingly: https://www.youtube.com/watch?v=YdkM_eSYXdw

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Allow me to repeat what our fearless governor said in cutting us each a check for $300:

"With inflation the highest in 40 years, we are giving back your hard-earned money and funding schools while cutting taxes."

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founding

The ideal stabilizer mechanism, IMHO, would be:

1. Set up Postal Banking.

2. Put in place a _permanent_ VAT (or land tax, or just an across the board income tax hike, or whatever else you want to choose) to fund a UBI, delivered as weekly direct deposits to everyone's Postal Bank Account.

3. Authorize the Fed to bump the UBI payments up and down to stabilize demand.

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Everybody agrees that inflation is bad. The problem is that the things that act as a proper solution to inflation, or stop inflation occurring at all, are even worse (at least in the short term). This is why Argentina got rid of it's dollar peg over 20 years ago and has been left with persistently high inflation ever since. To get the inflation down to normal levels would involve crushing increases in taxes, reductions in public spending or increases in interest rates.

Giving people more money as an inflation fighting tool is akin to giving a drug addict more drugs as a drug withdrawal fighting tool. If there was genuine hardship among the poor, a relief payment for them might be justified, but it should have involved tax rises on wealthier people to make them reasonably inflation neutral.

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I agree with your closing comment but not the opener about the solutions being "even worse." IMHO the solutions are better, and indeed are *solutions* that resolve the problem. Suck it up and take your medicine ;)

#TeamVolcker

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Giving politicians more money as an inflation fighting tool is akin to giving a drug addict more drugs as a drug withdrawal fighting tool. Witness Newsome.

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As good as their targeting. If the went to people in need o "relief" from taxpayers who needed it less, it was OK. Basically same principle as national "relief." Since in fact they were not targeted, they were not good economics, did reduce long term growth and did not transfer consumption from those that needed it less to those that needed it more.

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This article misses an important point about why interest rates are used to control inflation rather than taxes. This point is the whole reason why interest rates are used to control inflation in the first place, and the author seems to be unaware of it.

When inflation is expected to be high, *real interest rates are too low*. The real interest rate is equal to the nominal rate minus expected inflation. The reason to raise *nominal* rates is in order to bring real rates back to the correct level. Put differently, inflation results in distorted incentives to consume and invest today relative to tomorrow. That's why intertemporal prices (i.e., interest rates) are used to control inflation.

By contrast, the VAT proposal doesn't directly address intertemporal prices, and it could even have perverse effects. Suppose that people expect inflation this year to be high. Then people anticipate that *next year*, the central bank will raise the VAT. This makes consumption next year more expensive relative to consumption this year, which effectively lowers the real interest rate and boosts demand now.

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I didn't interpret this article to be an argument in favor of eliminating monetary policy as a tool to fight inflation. I read it as saying that, in an ideal world, we'd have *both* tools at our disposal. In the United States we currently only have one of them.

You're right to point out one of the advantages of using interest rates to curb inflation. But it seems there are disadvantages to overreliance.

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If I look at just the body of the article, I can see this perspective. I'd agree both that short-term interest rates are a blunt tool and that fiscal policy is sometimes an effective option to fight inflation.

But "Tax increases are the best cure for inflation: It's pretty weird that we use interest rate hikes to reduce aggregate demand" makes me take a much dimmer view of the article. It certainly gives the impression that the author doesn't quite understand the rationale for the conventional policy that the headline argues against.

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author

We plead guilty to coming up with a snappy if somewhat overly-simplistic headline for SEO/clicks purposes, yes.

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The argument was very clearly about the inferiority of monetary policy to fiscal policy.

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And in my view it made that case in convincing fashion.

Nonetheless, monetary policy has its uses, and it would be neither wise nor necessary to jettison this tool in the event we one day gain an enhanced capacity to manage demand via fiscal policy.

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founding

But the point you are making is that when inflation is high, one wants to raise interest rates to keep up, independent of whether that has any effect on the money supply. The point in this article is that tax increases reduce the money supply more directly than rate hikes.

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No, that's not quite it. Inflation results when demand is in excess of the economy's productive capacity, forcing suppliers to raise prices. The point I'm making is that controlling interest rates rather than the money supply is the best way to manage demand.

For the past forty years or so, there hasn't been a stable short-term correlation between the money supply, demand, and inflation. This is why modern central banks have abandoned the strategy of money supply targeting. (But note that even if you still think controlling the money supply is optimal, the central bank can take care of that without fiscal policy!)

Interest rate policy deals directly with the problem of controlling demand. When real interest rates are too low, consumers face a lower opportunity cost of consuming in the present (since the returns on saving are low) and firms have greater incentives to invest. This causes the economy to overheat and results in inflation. By raising nominal rates, the central bank hopes to raise real rates and neutralize this excess demand.

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The Central Macroeconomic Agency would use a combination of tax and interest rates to control inflation and employment not taxes alone.

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Mar 21, 2023·edited Mar 21, 2023Liked by Milan Singh

1st. Hey guys. I will go read now.

Random observations:

1. inflation: they raised the number of points you need to get a free Starbucks drink. Used to be 150, now its 200. Damn it.

2. Taxes of Upper Middle Class. So apparently this is me, though I dont feel like it (mainly because I have so many damn kids)... but what I trip out on is just how much taxes I pay. (40-50K a year). I really don't feel like I get much for my money (yes, this is the Republican in me).

3. So much Yale in this article... I should find out next week if my daughter is getting in (it's a long shot... but not impossible)

4. Inflation Part 2: Brother-in-law just raised all his prices by a dollar at his restaurants in Boise. Very little customer complaints, which means they expected it.

5. VAT: I lived in Europe for 12-years. Sure things were more expensive, but at least I knew what I was going to pay.

Random Thought Not Related: I had two daughters who were considering computer science as a Major... with the layoffs in Tech and now the advent of AI ChatGPT, I am starting to think engineering might be a better bet.

Bonus: I just posted about daughters college acceptance status: See link in my bio or go to here. https://hesterscollide.substack.com/p/audreys-college-acceptance-update?sd=pf

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author

I’m in Madrid right now. Was talking to my friend who goes to school here about VAT, my theory is that VAT being included on sticker prices makes you more aware of the final price you pay but less aware of the tax in place, and that lowering the salience of VAT increases political support/reduces opposition to it.

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I've been to Madrid before. I spent my time chasing girls, drinking and staying out late in clubs... not thinking about VAT!

The problem with VAT in Europe, is they still take out an income tax as well. So the benefits of hiding taxes doesn't really do anything, since you are still paying income taxes as well.

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¿Por qué no los dos (o cuatro)? If you saw Milan's picture from a week ago, it looked like he was accomplishing at least two of the three things that you did in Madrid.

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author

Only two, Maisie would have some words for me if I was out chasing girls.

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> I had two daughters who were considering computer science as a Major... with the layoffs in Tech and now the advent of AI ChatGPT, I am starting to think engineering might be a better bet.

As a software engineer, I think AI-augmented coding is just a continuation of a multi-decade trend in which we use increasingly powerful tools to abstract away technical challenges and common tasks. Notably, modern programming languages look more like English than those used in the 80s. And w/ SaaS and cloud infrastructure we can programmatically outsource tons of work. This not only makes the field more approachable, but also gives us massive leverage in applying software; a single engineer can now do the work that would’ve previously taken a dozen.

The economics of software engineering could certainly reach an inflection point and reverse, but so far compensation has only increased as we’ve gotten more powerful tools.

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Here’s a longer comment of mine elaborating on this thesis from a previous discussion at Noahpinion, https://noahpinion.substack.com/p/will-ai-take-away-the-coding-jobs/comment/12747176

As a software engineer, I feel that programming has already been largely commodified for at least a decade in that the mass majority of programmers are not solving technical problems, but instead are solving the social problem of, “exactly what should the software service or product do?” Once that has been figured out, the actual design and implementation is rarely much of a challenge.

This is the result of modern programming tools—notably compilers and runtimes, which are themselves computer programs—becoming sufficiently powerful to abstract away all of the technical challenges. For example, until well into the 80s most software engineers spent a substantial amount of time solving the problem of, “how will my program manage memory?”. Ie, how to use RAM. This is a hard engineering problem that not only drastically affects program performance, but also an error prone area where a single mistake could crash the program, or worse create security vulnerabilities.

Decades of computer science research and engineering has resulted in modern programming tools that totally abstract away memory management. Now the mass majority of programmers needn’t ever concern themselves with this hard technical problem. Numerous other advances in programming tools have similarly freed developers from previous technical challenges. Further, we now also have a plethora of reusable components in the form of code libraries and standardized software services (eg, software-as-a-service and cloud infrastructure) that we can leverage to abstract away almost any conceivable technical problem.

AI programming tools continue that trend, yet someone still has to figure out the specific intended behavior of the software service or product to an excruciating level of detail. I think this could be illustrated with an analogy to lawyers writing legal contracts. Lawyers can already draw from a large library of reference (or template) contracts from previous similar situations. In many cases these can be largely reused with minor modification. This is comparable to how programming can use existing libraries and services.

AI can certainly automate the drafting of contracts or computer code when the situation is sufficiently novel that reuse isn’t appropriate. Yet a practitioner still has to verify all of the details and make revisions to ensure intended behavior when executed in a court or computer. In programming, most of the time is spent figuring out what these details with a high degree of specificity through discussions with stakeholders, including end users or their representatives.

So while AI will likely substantially increase programming productivity, it is just a continuation of a trend. Even in the absence of AI programming tools, I think the field has been substantially commodified to the point that many, if not most, people could be a programmer. And the main challenge of determining intended software behavior at a high-level of detail still remains.

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Fellow coder here, and I agree with everything you've said in this subthread.

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> I had two daughters who were considering computer science as a Major... with the layoffs in Tech and now the advent of AI ChatGPT, I am starting to think engineering might be a better bet.

As a software engineer w/ 10+ years exp - with the advent of AI programming tools I think now is actually a great time to get into CS. I've played around with a handful of these and they're very powerful at coding but also clearly can do better in the hands of someone who spends a lot of time learning how to coax the best code out of the AI (prompt engineering).

This is definitely a new skill in and of itself, and I think a lot of the upcoming generation may quickly eclipse mine in terms of skillset & productivity at this new way of coding.

The layoffs are scary now but 4 years from now the dust will have settled & there will be a ton of new AI startups hiring.

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If you're paying 40-50k a year total, then you're getting a hell of a lot. Many or most of your kids go to decent schools on that money, all the local infrastructure is funded with it, as is all the nationwide infrastructure which makes your job possible, your local police force, your former employer (lol), all the R&D which birthed the modern world, retirement benefits and post-retirement healthcare, parks and playgrounds, nature preserves... how the heck could you take that money and buy these things or substitutes for them?

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founding

People who pay $2k per year get all those things also.

A better argument, in my view, is that the more you make (and have already accumulated), the more you benefit from the system and laws which protect you. Taxes are like insurance: protection of a home worth $5M costs more than protection of a home worth $50k.

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Rory benefits immensely more from most of these things than the folks who pay $2k in taxes, as do you and I. The most glaring example are the airports that are crucial to his work and paycheck (and mine), but they use the roads and infrastructure less frequently, avail themselves of the parks for less time, receive lower retirement payments, etc...

But yes, at the end of the day there's also the social stability angle to this. We fund these things in part to file the roughest edges off of market-driven outcomes so that the whole system has the legitimacy to preserve itself and, well, us.

The alternative is to reenact the role of the self-interested, oblivious Russian aristocrat in 1917-18.

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What is this "accumulate" word you speak of.... I only know the word "spend"

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Don't make me feel guilty!

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1. I’m a Dunkins partisan, and can’t even imagine how long it would take for their app to provide me with free coffee, at this point. Yet I have a friend who constantly gets random coupons through T-mobile who hooks me up with a free coffee coupon almost every week. Why are they rewarding random people instead of loyal customers like me?

Anyway, tell your daughter congrats from that random Randall guy in the SB comments. If you can turn any of your offspring into welders or toolmakers, I can get them a job by next week. Great pay, the difficulty is getting a day off.

Just curious, if you don’t mind saying: are you a contractor?

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My son is actually working as winder right now (working on generators... same industry as me). I have blue collar kids as well as smarty pants kids.

I am NDT (I inspect stuff) in the energy industry. I work for Siemens Energy. Side by side with welders, machinists, millwrights, pipe fitters.

And I understand about days off... I work 7 x 12 hour shifts pretty much all spring and fall.

What do you do?

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I think they’re currently calling me a Process Engineer. Mostly I work with Tier 1 or Tier 2 (occasionally 3) automotive suppliers who are having problems large enough to endanger their customer’s production. Figure out what their problems are and work to get them to a better place. I’m like Moses: I may not get you to the promised land, but I’ll get you out of the wilderness.

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So you use common sense to tell customers that they are doing obviously dumb things (which the workers probably already realize) and they listen to you because you are an outsider. Is that a good summary?

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As a representative of their customer I have leverage that insiders who want to fix things don't have. There are always people at the level of welders, toolmakers, quality engineers, who know what needs to be done. But they're not being empowered or given space to do it, usually diverted to reactive activity for short term gain. It's usually just a matter of listening to them and getting the boss behind them or at least sidelined and many times I can bring outside resources to help. If I'm visiting someone, they're almost certainly in crisis mode.

That probably all sounds terrible. But they're usually in a situation where they're paying a fortune to expedite, focused on immediate needs, and not thinking about prevention. Ways to not only get them out of the current crisis, but prevent them from getting in that spot again.

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Engineering is basically a guaranteed upper-middle class income.

Software or electrical are probably the best in this regard, outside some specialty fields.

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Unless Boston Dynamics has something extra crazy and awesome up their sleeve, nothing's going to replace getting eyes in the field in civil/mechanical.

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I am a fan of mechanical engineering myself.

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I'm a mechanical engineer...but I've switched to software for the $$$.

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Also, I expect that a lot of mechanical engineering design (CAD, FEA, CFD, etc) is going to be at least partially automated by AI in the next 10 years.

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I work with Field Engineers. Sort of work that cant be automated.

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As a CFD'er, pretty skeptical myself.

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I think the reason why we outsource inflation fighting to the fed is raising taxes is unpopular while the fed raising interest rates is opaque and detached. Biden can pretend he wouldn’t have made the call to not acknowledge it when in reality HE nominated Powell.

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"This all seems very unlikely to happen. But as a matter of good public policy, it should."

Dammit. How did you guys get a sneak peak at my tombstone?

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Delegating tax authority to the Fed would indeed "almost certainly be deemed unconstitutional", as well as antidemocratic, but, if using variable VAT rates is indeed as good an idea for fighting inflation as you say, don't give up that easily. Use your imagination to think outside the stale legal boxes and categories that much of the Democratic legal elite is stuck in, a time warp since the 1930s.

It's not necessary to delegate lawmaking power to the Fed to do this. Congress could pass a law, or ratify a technical regulation written by an agency, prescribing in a lot of detail exactly how the rates should change in response to changes in the inflation rate. Require the Fed, or some other statistics-gathering Federal agencies, to regularly compile and publish inflation rates, as accurately and honestly as possible. And then require the IRS to adjust the CAT rates according to the published inflation rates, in the manner that Congress specified. In simplest form, it could actually be a table, showing that if the inflation rate is X, then the VAT rate is Y.

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According to "The Power and Independence of the Federal Reserve" by Peter Conti-Brown at least the constitutionality of the Fed's structure itself is generally regarded as doubtful, though the Supreme Court has decided nobody has the standing to sue about it so it's sort of a moot point, but if the Fed had the power to tax suddenly that buried issue would erupt into a very big can of worms.

https://www.goodreads.com/book/show/26053742-the-power-and-independence-of-the-federal-reserve

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It's also possible Democrats will one day win a lot more elections and gives us a judiciary that is open to good policy.

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Where do I sign up to be the one who decides what is good policy vs bad policy so the judiciary knows which to approve?

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And closed to the Constitution?

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Mar 21, 2023·edited Mar 21, 2023

I'm not sure what that would be, but it sounds terrible. Just have Congress pass the law as Allan describes.

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One unspoken advantage of interest rates as policy is they ripple out automatically - they don't require anyone to do anything specific.

I do software development, and I can tell you that it would take a lot of extra effort to get everyone in compliance with a VAT that can change arbitrarily week-by-week. Obviously this isn't impossibly hard, especially for modern systems. But it would be a nightmare for people with older systems that wouldn't be designed to handle something that complicated.

You'd need to have rules around how rapidly you need to be in compliance with a VAT change. Make that window short, and lots of people will yell that you're being unfair and making unreasonable demands. Make the window long and savvy operators will exploit that to the hilt to minimize their VAT payments.

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Rather than increasing taxes, why not decrease spending?

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founding

That is even more of a political question, unless you have some broad based neutral spending that can be cut evenly like a universal basic income.

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I think UBI would end up being if anything more difficult politically to cut than even Social Security because the constituency in favor of receiving benefits from a UBI is literally everyone.

I think as a corollary this also suggests come caution in implementing UBI in the first place due to the essentially guaranteed ratchet effect that it's likely to have.

(Separately, decreasing real marginal utility of money results in non-uniform effects from a grant or cut depending on the recipient's SES, but I think that's a conceptually separate problem that nevertheless points to cuts in a hypothetical UBI being highly politicized).

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Cutting UBI would be highly regressive because everyone gets the same absolute amount of UBI but it would vary greatly as a % of I total income

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Just cut everything equally.

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It seems like this would particularly punish the most responsibly run programs with no fat to their budgets.

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Good point.

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This seems like an argument for spending audits, which I'd support.

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How expensive do you think it would be to run additional regular spending audits on every program and department outside of anything that’s currently in place?

If they’re net positive, is there a reason we don’t conduct them now?

(This is outside my knowledge base, so I’m genuinely curious.)

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Mar 21, 2023·edited Mar 21, 2023

I don't know any of the specifics, but I suspect if tens of billions of dollars spent on more tax audits will actually yield hundreds of billions in new revenue, then it is probable that increased spending on audits can yield similar results. It won't be enough to make a major dent in the deficit, but it can be a starting point for spending cuts.

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There is a way around the constitutional problems with delegating taxing authority: fixed tax increases combined with counter-cyclical supplements to benefits. First, raise the income tax enough to fund the new spending and possibly reduce the structural deficit a bit. Whether you should hit the top half or top quarter of the income distribution is debatable, though it is clear you have to go deeper than the top one or two percent to stabilize aggregate prices. Second, legislate that enhanced unemployment benefits and stimulus payments are disbursed when unemployment exceeds certain thresholds. There could be small enhancements when it exceeds 4.5%, moderate enhancements when it exceeds 5.5% and big enhancements when it’s over 6.5%. When unemployment is under 4.5%, there would be increased taxes but no enhanced payments, which would combine to curb inflation.

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Mar 21, 2023Liked by Milan Singh

Yes. We should do a lot more auto-stabilizing—in both directions.

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Leaving aside the unreality of this proposal, as our authors readily admit, would we *want* to put management of the business cycles entirely in the hands of technocrats? We've already gone halfway in that direction, with Fed control of interest rates, but would it make sense to give them the other, fiscal, tool to do so as well?

I'm a good government, solid Democrat type of person, and I quail at that prospect. I don't fully trust people who are entirely removed from the political (i.e., democratic) process.

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Interest rates have been artificially low for a long time. I'm not THAT old but I can remember when you could routinely get 5% interest from an ordinary savings account.

That the interest rate on savings dropped to essentially zero was the result of so-called "quantitative easing" - printing money to finance chronic budget deficits. You can argue whether spending was too high or taxes too low, but these deficits were, and still are, the root of many economic evils.

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author

I think low rates were more a function of population aging.

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This whole mess has been caused by the greed behind these artificially low rates. I'm all for the variable consumption tax proposed in the article. It would control deficits by raising revenue and allowing the Fed to keep rates higher. You should have to pay interest to borrow money. It's a service. You should be able to balance your portfolio betweens cash, bonds, and equities in order to manage the risk of economic cycles. The last 10-15 years has been a stupid bubble created by this Wall Street/Washington revolviing door. Outsourcing R&D and the risk associated with it to venutre capitialists and private equity should never have passed any smell test.

The current tax code is written and maintained by lawyers and accountants whose livlihoods depend in its complexity. Imagine what we could do if we put back all of the money the investment bankers, lawyers, advisors, and accountants suck out of the economy. Algorithims could set interest and tax rates and do a much better job than Jerome Powell. Collecting a consumption tax would be easy, just another transaction fee. It would also free up everyone to quit obsessing on interest and taxes so they can focus on generating profits by running their business effectively, investing smart, and spending within their means, which will grow our economy just as well or better than propping up spending with easy money.

Sorry for the Utopian rant, but the stupidity of the past year has been tough to take.

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It’s amazing how little blame TCJA has gotten for inflation

Taxing the wealth of the wealthy I think would be more just than taxing upper half of labor income though. I think it would also long term shift productive capacity away from mega yachts towards broadly accessible goods.

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founding

It isn't amazing -- the TCJA was passed in 2017. Inflation didn't take off until 2021.

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founding

What is the expected lag between tax policy and inflation? And how much of the tax policy went into effect immediately vs a year or so later?

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founding

2 years.

Almost all of it was immediate.

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founding

It went into effect on Jan 1, 2018. A two year delay seems to match the observations almost perfectly given that there was a temporary huge deflationary hit to the world in February/March 2020.

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Mar 21, 2023·edited Mar 21, 2023

Wouldn't this mean that tax increases also have at least a 2-year lag time with respect to inflation? The Fed has decreased the month-to-month inflation rate quicker than that.

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Mar 21, 2023·edited Mar 21, 2023

I'm not following exactly. Just on the used-car side which was (is) a high % of the inflation increase ... prices started increasing the week both rounds of stimulus checks when out as inventory levels dropped.

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founding

That's the sort of empirical evidence whose details I don't know, but would be very useful for settling this question. I had thought that a lot of the used car stuff was about the combination of the chip shortage causing a lot of new car-used car substitution, and the rental agencies having liquidated their fleets and no longer creating a supply of used cars. But if it turns out those effects weren't as big as I thought, and the stimulus check was bigger, that would change things.

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OK if letting the Fed set VAT rates were possible bumped up and down by a few basis points like interest rates then, yes that could be "best." And EPA should levy pigou taxes on CO2 emissions and other pollutants. FEMA should set the rates on Federal disaster insurance. Etc.

Again, I'll take your position as really an argument for a regime change in which fiscal deficits are much lower and Fed-set interest rates are much lower.

BTW higher interest rates do not necessarily need to stress bank. It they are aware that the can happen, banks can lend with VR instruments. The Treasury could finance small, transitory deficits around zero with ST instruments or VR longer term instruments.

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Progressive marginal tax rates: The original means testing for state subsidies and the social safety net!

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Isn't that what we have now?

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On the tax side, yes, but a lot of safety net programs have huge means-testing cliffs that result in highly regressive rates around those cliffs. So I think what davie is talking about is making subsidies and safety net programs (more) universal rather than means-tested, and making up for that with higher and/or more progressive marginal tax rates.

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Sure, but they could ramp up quicker and have better enforcement at the high end.

It'd do a lot to diminish discretionary spending, and folks who are willing to overpay or bid up the price on their discretionary spending.

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And while we are at it progressive _consumption_ taxes.

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I'm not sure how politically palatable it would be to increase prices even more by raising consumption taxes when prices are already increasing too fast for people's comfort.

Under this policy, price increases due to inflation will be faster and larger, but presumably stop increasing sooner. Is this what the average person wants? People complaining about the prices of things will be even more impacted by faster and larger price increases.

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Repeat after me: "Inflation is always and everywhere a monetary phenomenon."

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