Fishman on coddling young industry.

Jay Fishman writing for Bloomberg View:

An obvious way to promote small business would be to reduce or entirely eliminate their taxes during the first three years of operation. While there are no reliable statistics showing how much in federal and state taxes new businesses pay, it is clear that taxes can be a burden on these enterprises. The average, profitable small business pays an effective tax rate of about 20 percent, according to a study commissioned by the U.S. Small Business Administration. Although many startups aren’t profitable in their initial years, those that are would be able to plow back earnings into their companies and, in turn, hire more workers.

This is an intriguing concept, but wouldn’t backwards induction render this ineffective? Firms know in year three that year four entails increased costs, and begin to provision for them. So in year two, they know that year three means provisioning for year four’s costs, and make provisions. So in year one, they make provisions for year two’s saving. This renders the temporary relief ineffectual.

To that end, I disagree with this part of Reihan Salam’s reaction:

firms that can survive during this incubation period might not be able to survive once they’re obliged to pay “big boy” taxes, so we’ll create firms that are essentially hothouse flowers.

I think this is possible, but I think it is more likely that only firms that can tough it out will do so regardless of the temporary relief. This is unless firms have an expectation that the government will intervene to extend relief beyond three years anyway if they begin to falter. That is certainly possible and would alter the incentives. The prospect of such discretionary handouts is also disturbing since we should be trying to move toward fairer tax policy. So count that risk against Fishman too.

But I do agree with this part of Salam’s reaction:

I’d much rather we embrace lower taxes and deregulation for all firms.

The best way to ensure firms respond appropriately to public policy is to make them believe the status quo has been permanently altered.


I hate stories in one graph, so here’s 3.

Joe Weisenthal tries to stand with the President that in fact the private economy is growing well and that in fact our woes are with the public sector. There actually is a lot of truth in that – there are a number of indicators that suggest the government is doing everything it can to undermine gains made by the private economy.

But the President screwed up. How? He said “the private sector is doing fine.” Weisenthal’s private sector graphs are up and to the right.

He shows that corporations have record profits.

Investment is up.

Landlords are doing awesome because of rent inflation.

There are more jobs than when Obama took office.

Here’s why this is wrongheaded:

Corporations might be people. But they can’t vote. That they have record profits and that they are somewhat investing is irrelevant and perhaps hurtful for reelection chances if they are not passing those benefits on to real people. And they are not. Look at per capital GDP.


We are well below potential. And on aggregate, Americans were last this poor just prior to 2006. Does the significance of that jump out? Americans are poorer than when the president took office, and barring a miracle they will still be poorer in November.

Even worse, they are working less hours. If you’re lucky enough to have a job, you’re still languishing.


And yeah, if you’re a landlord you’re doing gangbusters. But more people are renters than landlords, and the cost of renting is eating incomes alive. When you have high unemployment and high inflation, it’s bad. Finding a place to live right now is not fun. And we’re not authorizing, much less building, all that much new apartment supply to take the pressure off right away.


As far as Weisenthal’s “we have more jobs than when Obama took office” stance: well we also have more people. And it’s not mystery that job creation isn’t keeping pace with population growth.

Now, why do I think my story is better than Weisenthals’s? Because mine isn’t about balance sheet figures and the profits of select individuals. It’s about the aggregate state of real voting people in this economy. That the two stories don’t gel well is something worth discussing. What isn’t worth discussing is that Obama was unequivocally dumb in what he said.

In the future…

A bearded man sits at a desk. He is the chairman of the Federal Reserve. He is a life-long academic. He holds a PhD from a vaunted Ivy League Institution, where his dissertation is widely regarded as one of the most penetrating of analyses on depression economics, especially monetary policy during the “Great Recession” of the previous century. He is, at his desk, watching the trading of NGDP futures. All seems well — no crisis here.

One of the ironies of the chairman’s dissertation — the one that really makes him chuckle to himself — is that his Great Recession predecessor was, like him, a student of depressions. In some ways, it could be said that the central bank had learned from the Great Depression of the early 20th Century because monetary policy seemed much looser during the Great Recession. There were, after all, 5 iterations of “Quantitative Easing” between 2008 and 2020.

But this was an illusion. That’s the great insight, really, of his paper — why it was so well received. It challenged the notion that progress is an upward trajectory. It repudiated the idea that we don’t always get it right the second time around, but we’re damn closer. Sometimes we regress in our actions even in spite of our putative understanding.

Because, you see, a rogue group of intellectuals in the emergent “blogosphere” of the early Internet pointed out that monetary policy was in fact too tight all along. These people were both radical and traditional. They wanted to change the entire monetary regime by replacing interest rate targets with nominal income targets. Yet their analysis rested on a simple age-old foundation: MV=PY.

They went ignored, and the economy languished for years. After all, there was really just one great academic among them, but he wasn’t from an Ivy League institution. Another irony of the dissertation: the bellwethers were a handful of bloggers who generally opined on broad issues of political economy, and even a high schooler blessed with distinct natural and temporal privileges, but a high schooler nonetheless.

After the Great Depression, the Ivory Tower led the way in understanding what went wrong and creating a regime with the idea of “never again.” Then it happened again. After the Great Recession, it was the slow and painful bottom-up lowercase-d democratic dissemination of ideas by a humble class of a few who ultimately prevailed in changing the regime, again.

At the time their singular, penetrating focus and advocacy on NGDP targets led people to call them myopic. It turns out they saw more broadly than anyone. That novel insight dressed in sophisticated data presentation at an Ivy League institution does a future Fed chairman make. Some things never change.

Of course you know this means war.

Matt Yglesias ponders Star Wars and militaristic monetary policy.

The problem here is that the ECB loses that power if it commits itself to implementing optimal policy. A central bank should be stabilizing the growth path of aggregate demand. But a central bank that’s actually doing that has no leverage over anyone else. It’s got an important job to do and it’s doing the job well. Here in the United States, the Pentagon’s Strategic Command has the power to launch nuclear missiles and destroy the world. In theory, that could give it enormous leverage over tax policy. In practice, the officers who run Strategic Command due their duty rather than threatening to unleash mass death on the planet unless they get their way on unrelated issues.

Yglesias suggests institutions, including central banks, could be more activist, but won’t, and ultimately shouldn’t. He shies away and decides it would just be nice if the ECB did it’s actual job well, much less try to use its influence outside its mandate.

This reminds me of a time I had the pleasure of seeing the uncensored Karl Smith in person.

He was discussing what our public institutions could do if the ECB (read: the Germans) sat back and actually let Europe go to hell. He suggested that if it really got dire the Fed could and probably should launch an unceasing assault against the Euro.

Now, if it comes down to world economic collapse because some central banks do horrible monetary policy, and the US central bank launching speculative attacks against currencies to coerce proper policy responses, I side with the Fed. So give Bernanke the guns.

This is just to say I think Yglesias is too restrained — or hasn’t thought widely enough on the possible worlds we could be living in.

Pondering debt.

Counterparties links to this blog post excoriating David Brooks.

David Brooks is again prominently displaying his misunderstanding of economics in the New York Times. He told readers in today’s column:

“Every generation has an incentive to borrow money from the future to spend on itself. But, until ours, no generation of Americans has done it to the same extent.”

He then goes on to tell us that we are borrowing because we are more secure, arghhhhh!

Okay, let’s try to put this so that even David Brooks can understand it. First, we are not borrowing money from the future. What does Brooks thinks this means, are we calling up the Ghost of Christmas Future and asking for a loan?

This critique is what seems terribly flip and awfully wrong.

Let’s say I am taking on debt. To me, I am making a promise about things that I will do going forward — namely coughing up cash regularly.

If you’re my lender, you’re also dealing with the future: you’re laying claim to my future income stream to reimburse yourself.

So yeah, practically speaking the transaction is taking place in the present but you’re basically fronting me my own future income. I have more money today, and less tomorrow. I took it from the future and brought it to the present, where it’s more valuable.

This is what Brooks means, and that doesn’t seem very hard to wrap my head around.

These seem like insecure times, but with respect to debt we are awfully secure. Even in the wake of financial crisis, there is a huge market for debt.

Now if I die, I never have to pay that back. This seems really important because Brooks is really talking about public debt. In general, our government finances a good portion of its consumption purchases, which in part to provide us with goods and services. That debt will be rolled over numerous times throughout our lives and I guess some of our taxes will help make interest payments, but for most of our lives our government will systematically pull money from the future to the present to finance our welfare state. Then we will die. And even after financial crisis, modern capital markets run so fluid and deep that governments and large firms can accumulate and roll over debt with relative ease. This is an appropriate sense of “security” and I imagine this is what Brooks is driving at.

This is how CEPR characterizes it.

Borrowing occurs in the present, from some to others. At present, the government sector is the big borrower. It is borrowing from the private sector, but also in part from the Federal Reserve Board. Because the economy is so far below its capacity, the Fed can simply create money to lend to the government to finance spending. And, this borrowing is aiding the future by sustaining demand in the economy. If the government spent less (or taxed more), it would simply reduce demand and increase unemployment.

This is right and wrong to me. Yes, the borrowing occurs in the present but that’s the point. We live in today and every day out from here is less and less certain. This is the foundation of why we have interest rates in the first place. But what does CEPR think happens to treasury bonds when the fed prints money to buy them? Surely it doesn’t think the fed directly finances government spending. Those bonds end up as assets on the fed balance sheet and as liabilities on the US Government’s. Yes, the fed can make cash appear from nowhere but crucially it still has claim to future government revenues, even if those revenues come from future bond sales.

I happen to be of the belief that people like Brooks are wrong that we need a dose of debt sobriety. It might be good for the soul, but in a nation with a sovereign currency I don’t think it has much practical significance. But as far as Brooks thinking about the dynamics of debt, he seems to grasp the intuition well.

CEPR ends with this:

btw, Brooks deserves special abuse for this assertion:

“Nations around the globe have debt-to-G.D.P. ratios at or approaching 90 percent — the point at which growth slows and prosperity stalls.”

Sorry, this is fairy tale stuff. Yes, some respectable economists say it, but it’s still silly.

I’m a little astonished an intellectual, whoever they are, would write those last two sentences without a sense of shame. I’m not even saying he’s wrong, but such arrogance is really off-putting to me, and truly demeans an incredible amount of scholarship that went into Reinhart and Rogoff’s work on debt and crises.