America’s Ungovernable Budget

Politicians can make endless promises, but if the government's budget doesn’t add up, politics is little more than mere words. The US is now caught in such a bind, because taxes are too low to fund adequate government services, and to propose raising them would be political suicide. Read Jeffrey Sachs' (Columbia University) column for Project Syndicate here.

Where does the Laffer curve bend?

With the Bush tax cuts due to expire soon and debates about raising top rates further to cut the budget deficit soon to follow, the Laffer curve is bound to come up again. The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away. Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed.

Dylan Matthews from the Washington Post decided to ask some tax experts and political activists where, in the current personal income tax, and particularly in the top tax bracket, they think that Laffer curve peaks - that is, what that revenue-maximizing rate is. The responses were varied, to say the least. Read everything about it here.

The Cato Institute's analysis of Obama's state of the Union

The 2011 State of the Union Address

State of the Union: The Word is 'Jobs'

As State of the Union addresses go, President Barack Obama’s speech Tuesday was notable for its economic vision. The question is likely to be whether the Congress is going to enact any of the policies and initiatives that Obama called for in his speech. Read the complete Brookings Institute commentary here.

Obama's economic proposals: Okay, as far as they go

America, President Obama emphasized in his State of the Union address, must really be open for business. It must create growing markets for the alternative energy industry. It must generate more scientists and engineers. It must build high-speed rail and Internet to compete with other nations'. It must adjust corporate taxes so they're more in line with our global competitors'. All of these proposals are well and good, and a distinct improvement over the Republicans' alternative program of disinvesting public funds in the nation's future in hopes that the private sector will take up the slack. But making America more open for business addresses just one part of our national economic decline. The other challenge is how to make our corporations more open to doing business in America. Read the complete article in the Washington Post here.

More confrontation predicted between US and China - The WSJ Big Interview

How to Improve the Financial-Reform Law?

"Now that the Dodd-Frank financial-reform bill has become law, the real battle begins. Despite the law’s 2,000 pages—or possibly because of them—there is much ambiguity about what its eventual impact will be. The Wall Street Reform and Consumer Protection Act, as the law is officially known, grants the Federal Reserve enormous regulatory power. The Fed can now unilaterally decide that any financial institution is “systemically important”—meaning that its failure could destabilize the financial system itself—and impose any sort of regulation on it, such as requiring that it hold more equity capital, limiting the amount of short-term debt it can issue, forcing it to write up a living will, and so on. [...] There is a better alternative. The Federal Reserve can announce what minimum conditions firms must meet to avoid being designated as systemically important. Each firm can then decide whether to meet those conditions or face federal regulation. And basic principles of economics can tell us what these minimum conditions should be". Read the complete article in the City Journal here.

China’s Currency Isn’t Our Problem

Says Marc Wu from Harvard in the NYTimes. Read the complete opinion article here.

Basic Questions, Elusive Answers on Health Law

"Mr. Ryan expressed one of the Republicans’ main complaints: that Democrats and independent Congressional budget analysts have underestimated the costs of the law, which Republicans say will ultimately add hundreds of billions of dollars to future federal deficits. The nonpartisan Congressional Budget Office disagrees. In its official analysis, the budget office estimated that the cost of new benefits in the health care law would be more than offset by revenues from new taxes and by cuts in projected Medicare spending, reducing future deficits. Repealing the law, the budget office has predicted, would add $230 billion to federal deficits from 2012 to 2021". Read the complete article in the NYTimes here.

The Invention of Money

Karien suggested this excellent podcast from the National Public Radio to me today. "It explains with great clarity and humour what the FED usually does - and what it has been doing since the beginning of the financial crisis", Karien commented. And she is right. A must-hear!

You have to love this cartoon...

How the West was lost

Dambisa Moyo is one of the rising economic stars. This Zambian Oxford scholar became famous with her first and very controversial book "Dead aid" in which she pleads for abolishing foreign development aid, especially in Africa. Her new book "How the West was lost" should be on the bookshelves this month. The book offers a bold account on the decline of the economic supremacy of the West over the past 50 years. In particular, Moyo examines how America's flawed decisions and blinkered policy choices around capital, labour and technology - key ingredients as you all know for economic growth and success - have resulted in an economic and geo-political seesaw that is now poised to tip in favour of the emerging world. I was very impressed by her first book and I'm looking forward to reading the second, especially because it seems quite relevant to this class.

Dambisa Moyo, who also studied at Harvard's Kennedy School of Government, also talks about the structural problems of the US economy. Have a look!

How to Reboot America

Judging Obama's economics

"He deserves more credit then his critics give but less than he claims", says Robert Samuelson in The Washington Post.