Hope and Fear – Part I: Year of Promise - Eric Janszen

[Polish_Silver]

Re: tax vs work hours in Asia, europe

As I alluded to toward the end of my piece, the situation is complex and confounding.

One other related Idea. Akerloff investigated the effect of unemployment insurance, and found out that the more liberal it is, and the longer it lasts, the longer before unemployed people find another job.
Now that is not necessarily a bad thing, if it means they found a premium job they liked, verses taking the first thing sufficient to pay the rent. But it is a good example of how incentives change behavior.
If I could collect $2k/month indefinitely without working, I would just find a way to live on that and never work again, except when I wanted to.

[LorenS]

Re: tax vs work hours in Asia, europe

We have it ass-backwards. We tax people who work. We do not tax people who push FIRE paper around. Capital gains should be taxed at the highest rates, not the lowest. Interest expenses should never be tax-deductible. Interest income should be taxed high.

You have hit on one of my pet peeves. Capital gains has two components, one is a real gain from trade, the other is merely a symptom of inflation.

In my experience, for regular people, capital gains is nothing more than a manifestation of inflation - there are NO gains, it's just an illusion. Taxing those people heavily for inflation they have no control over is unfair and corrupt.

If you want to work out something for those those who make short term profits for a living I'm willing to find something reasonable people can agree upon. Most folks have no clue, and the moment you bring up indexing capital gains taxes for inflation they lose interest and move on to another hot topic.

[EJ]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

EJ, thanks for that long piece. I understood most, but there were a few bits I found puzzling - I will have to read again and think about them. There is one nitpick that I would like to take up. It relates to your attribution to GRG55 about the effect of taxes on motor fuels, tobacco products and work. I'm not asserting the entire quip is slam-dunk wrong - but it is quite problematical, especially the part about work -which is flat wrong. I'll come back to this.

People will listen to you. They will heed what you say. You have form. One downside of this is that you have to be a mite careful about your comments, and that quip falls into the 'be careful' category. However, "stuff happens". Its like one of the inhabitants of Pandora's box. Once released, it can never be re-captured and shut up.

Consumer expenditures on domestic transport fuel is, part inelastic, part discretionary. Its easy to 'tax', and increasing the tax does lead to a reduction in traveling - at the margin! The tax is highly regressive - its not income related. Here in Europe, high transport fuel duties has the effect of getting auto manufacturers to produce fuel-efficient, four-cylinder engines. Despite this the proportion of miles traveled in different countries varies considerably. Its less in countries with well developed, highly integrated public transport networks, higher in countries with less developed networks.

The matter of tobacco product consumption immediately runs into the little problem of the highly addictive nature of one of the active ingredients. I seem to recall that some CEOs of tobacco companies had a run-in with the US Senate over the 'addition' of nicotine to some of their brands. Now, I wonder why? Anyways, I do not smoke, so I'm indifferent to any increase in tobacco duty (which is also a highly regressive tax) - but not so some members of my family! When our government increases tobacco duties -they have an initial 'come-to-Jesus' moment and either quit or reduce. But the 'way-of-the-flesh' .... ... You get the picture. The one government initiative that has reduced tobacco consumption is mandating the poor sods smoke outdoors! Outdoor activity might be fine in some southern parts, but here in Ireland its can be a tad drafty, cold and wet.

Now the 'work' matter. As I asserted above, the idea that increasing taxes on waged-labour actually incentives persons to 'work less' is junk. The empirical evidence refuting this is available in peer reviewed journals. So anyone whose particularly interested in Labour Economics can follow it up. The primary focus question that all need to ask is: "Why do folk have to engage in waged-labour?" In some cases it is hardly for the good of their healths! They need to live; to eat; to raise families; to house themselves; to cloth themselves; to educate themselves: to equip themselves (they need to be fit and able to engage in waged-labour) - and, this is rarely mentioned, to have something over after all costs have been settled: they have to have 'a Life'. What's so hard to understand here? A great deal it seems.

If some contributor wishes to raise the matter of Welfare Transfers - again, they need to start with that inconvenient focus question; "Why do folk need an income?". It sure as hell is not as simplistic as I have sketched above.

Again, thanks for your article. Best wishes to you and all on iTulip.

Brian

Brian,

Thank you for your comments. Yes, I know taxes on gasoline and cigarettes are consumption taxes, and comparing them to income taxes is if not apples and oranges is oranges to cumquats. Tax questions are always difficult to separate from politics. I was at a small gathering a few years back where Paul Volcker opined that the U.S. needs a VAT but won't get one because liberals find it too regressive and conservatives find it too fair. I was surprised to hear the famous conservative economist propose the idea of squeezing VAT goo into the smooth running gears of American commerce because it's the lesser of evils of a progressive tax system that incents the the most productive taxpayers to pay accountants to find loopholes, but that's his opinion and I respect him for it.

I assure you I have read all of the relevant literature before reaching the following conclusion: now is not the time to raise taxes of any kind on anyone, rich or poor. The economy is almost shrinking. My comment about taxes and incentives is not meant to be taken in the abstract the way all of these papers are written.

Consider, Income Taxes and Incentives to Work: An Empirical Study, The American Economic Review, September 1957:

"The question of how incentives to work are affected by high and steeply progressive income taxes has long been approached with caution by tax economists, whose answers have been full of tantalizing ambiguities. It has encountered no such reticence, however, on the part of the great bulk of financial experts and journalists who with ready clarity on the point have had no difliculty convincing the public of the truth of the axiom that high taxes inevitably mean a reduction in the aggregate work supply. This has frequently been cited as one of the major causes of Great Britain’s present economic tribulations and has been held up as a warning to our lawmakers to beware bringing the same fate on this country.

"In the face of such overwhelming public opinion, the specialist who goes into the relevant economic theory in detail finds himself able to maintain with assurance only that the matter is not so simple. Whereas taxation certainly does tend to impair incentives by reducing the net monetary reward to be earned by an extra hour’s work, it also exerts a quite opposite effect in that it lowers the taxpayers disposable income and hence increases the pressure on him to earn more."

I think all of these peer-reviewed papers miss the mark. The question of the impact of high or low taxes on work incentives is the wrong question. The question is the impact of rising or falling income taxes under various economic conditions.

All other factors of economic growth being equal, periods of falling income taxes, like periods of falling interest rates, are times of rapid economic growth when consumers have more disposable income and producers more profits to re-invest. Periods of rising income taxes, conversely, are periods of economic stagnation.

The challenge for the economic historian is that other factors of economic growth are never equal. The economic environment for the income taxes periods shown below include wars, inflation, deflation, rising and falling interest rates, and so on.


Chart prepared by Citizens for Tax Justice.

However, despite all of the variances one correlation stands out: the post-war period from 1921 to 1929 when the top income tax rate was cut from 73% to 24% corresponded with an economic boom, as did the income tax reduction from 50% in 1980 to 31% in 1992. The 1980 to 1992 period is also one of ever-rising federal deficits as increased borrowing replaced lower tax receipts.

My comment has to be taken in the context of our times. The economy is firmly stuck in an output gap awaiting the next crisis to shove it back into recession. Wages are stagnant and declining in real terms as energy and foods costs rise due to persistently rising energy production costs. The labor markets are highly competitive, with everyone working harder for the same or lower income than before the crisis.

I don't see how a worker can under these circumstances is motivated to work harder for a paycheck that is additionally deflated by an increase in payroll taxes.

[bpwoods]

Re: tax vs work hours in Asia, europe

"But it is a good example of how incentives change behavior." Or should that, "how behaviours affect the incentives?"

Labout theories appear to be constructed on the basis of a homogenized matrix of persons and jobs. In reality the situation is a highly varied, heterogenous, klaidoscopic mixture. The former situation is fully amenable to 'mathematical treatment' - hence some of the dopey economic assertions; the latter is a semi-confounded mess. When I first encountered labour theory in macroeconomics I was struck by its similarity to the theoretical concepts of Michaelis-Menten enzyme kinetics - especially enzymes with multiple sites. When I ran this past one of my postgrad tutors he thought I was daft! Perhaps he was correct, but the idea that human labour units somehow or other can rationalize their 'selling price' seems weird - and it is weird. Thanks for reminding me about Akerloff. I will track-back and see what he had to say. There is alsoTruman Bewley's [Why Wages Don't Fall During a Recession]. I've only got to chapt 2 - chapt 8 deals with 'shirking'.

See you around. Brian.

[bpwoods]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

EJ, I really appreciate your constructive and very informative comments. As I may have mentioned (some time ago) my 'economics education' commenced here on this site. I have archived many of the articles of interest to me and I have one from 2004, though 2005 seems to more likely as my 'start date'. After three years I knew enough (sez me!) to return to college as a somewhat antique undergrad and take a degree (joint major in Economics and Politics). I graduated in 2011 (most BAs in Ireland are only 9 semesters). I thoroughly enjoyed the experience - though the exams were a pain-in-the-butt! You may or may not be 'pleased' to know that none of my professors knew what FIRE was! Seriously! Many thanks again for opening up a whole new world for me.

I'll have print out and study your commentary, and since I still have access to jStore I shall get the Break article as well.

Again, best wishes. Brian.

[Slimprofits]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

Out of sheer human curiosity, and not at all because I want to steal your business, I would love to know what caused this change between 1/1 and 1/24:

As I wil demonstrate in my next article all of our major recession forecast indicators are flashing orange or red. I expect a recession and major market correction in 2013. Stay tuned.

CI: Are we going to have a recession in 2013? A mid-gap recession, as you call it, before the output gap closes from the last recession?
EJ: We will have a recession before the 6% of GDP output gap closes. That is a 100% certainty in my view. Whether we get it this year is another matter.

[Chomsky]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

Out of sheer human curiosity, and not at all because I want to steal your business, I would love to know what caused this change between 1/1 and 1/24:

I also was wondering that.

[EJ]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

Out of sheer human curiosity, and not at all because I want to steal your business, I would love to know what caused this change between 1/1 and 1/24:

In the future I'll refrain from drawing conclusions from preliminary work. That said, the finished work still points to a major recession and market correction in 2013, but conditionally.

My conclusion is that the post-bubble economy is operating near stall speed, which conclusion was confirmed by the announcement Wednesday that the economy contracted slightly in Q4 2012, give or take a percent or so of revision to the GDP data later. That means even a minor demand shock will push the economy into recession, definitionally two quarters of negative GDP growth. That ties the probability of recession to the probability of a demand shock such as is usually caused by an oil price spike.

The Fed, ludicrously, blamed the contraction on the weather. I don't recall a quarter of robust growth when the Fed credited good weather. Surely the Weather Effect works both ways.

In reality, the credit bubble that the Fed helped create popped in 2008 and no amount of QE or duration of ZIRP will get it going again. The Fed re-learns the lesson of the 1920s and 1930s: What credit bubbles giveth, debt deflation taketh away.

Static Chart

Was 1:1 the maximum ratio of household debt-to-GDP?

Dynamic Chart

[vt]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

One explanation I saw for the poor 4th quarter GDP performance was that companies and individuals were holding back activity because of uncertainty of the fiscal cliff. Now that the crisis has been averted temporarily, we could see a terrific 1st quarter. The political bouncing ball will someday cause grief, but for now we are also likely seeing some brief movement from bonds to equities because of poor yields and rising rates.

[ProdigyofZen]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

In the future I'll refrain from drawing conclusions from preliminary work. That said, the finished work still points to a major recession and market correction in 2013, but conditionally.

My conclusion is that the post-bubble economy is operating near stall speed, which conclusion was confirmed by the announcement Wednesday that the economy contracted slightly in Q4 2012, give or take a percent or so of revision to the GDP data later. That means even a minor demand shock will push the economy into recession, definitionally two quarters of negative GDP growth. That ties the probability of recession to the probability of a demand shock such as is usually caused by an oil price spike.

The Fed, ludicrously, blamed the contraction on the weather. I don't recall a quarter of robust growth when the Fed credited good weather. Surely the Weather Effect works both ways.

In reality, the credit bubble that the Fed helped create popped in 2008 and no amount of QE or duration of ZIRP will get it going again. The Fed re-learns the lesson of the 1920s and 1930s: What credit bubbles giveth, debt deflation taketh away.

Was 1:1 the maximum ratio of household debt-to-GDP?

I think the next GDP print comes out Feb 28th. We should have a more clear picture of Q4 then.

I expect to have positive GDP growth Q1 but less than 1%. With China growing again I believe it is helping to push oil prices high plus the continued tension in the MENA region.

The revised GDP on Feb 28th might be bumped up to +0.1% or a little more I suspect. That way we won't have the odd occurrence of having a negative GDP print that didn't turn into a recession, which would be the second such occurrence in the last 50 years.

Perhaps the S&P gets to 1550 this year then we have a 20% to 40% pullback with the mid-gap recession.

A 40% decline from 1550 would put the S&P 2013 bottom at 930 and a 20% decline would hit 1240.

[jk]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

the -0.1% estimate benefited from a NEGATIVE chained deflator adjustment of, iirc, -0.6%. so if they didn't notice the deflation that pervades the economy [/sarcasm off] the estimate would have been worse.

[ProdigyofZen]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

One explanation I saw for the poor 4th quarter GDP performance was that companies and individuals were holding back activity because of uncertainty of the fiscal cliff. Now that the crisis has been averted temporarily, we could see a terrific 1st quarter. The political bouncing ball will someday cause grief, but for now we are also likely seeing some brief movement from bonds to equities because of poor yields and rising rates.

Military spending collapsed -22%. Aka federal spending collapsed.

I was just in a meeting with an economist yesterday who was saying how much federal spending was and I brought up the fact that Fed Net Outlays has been declining year over year at the fastest pace since the 1950s.

He didnt have an answer. This is par for the course.

[Chomsky]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

Thanks EJ.

[FRED]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

In the future I'll refrain from drawing conclusions from preliminary work. That said, the finished work still points to a major recession and market correction in 2013, but conditionally.

My conclusion is that the post-bubble economy is operating near stall speed, which conclusion was confirmed by the announcement Wednesday that the economy contracted slightly in Q4 2012, give or take a percent or so of revision to the GDP data later. That means even a minor demand shock will push the economy into recession, definitionally two quarters of negative GDP growth. That ties the probability of recession to the probability of a demand shock such as is usually caused by an oil price spike.

The Fed, ludicrously, blamed the contraction on the weather. I don't recall a quarter of robust growth when the Fed credited good weather. Surely the Weather Effect works both ways.

In reality, the credit bubble that the Fed helped create popped in 2008 and no amount of QE or duration of ZIRP will get it going again. The Fed re-learns the lesson of the 1920s and 1930s: What credit bubbles giveth, debt deflation taketh away.

Was 1:1 the maximum ratio of household debt-to-GDP?

If you can't see the dynamic chart in EJ's post there's nothing wrong with your browser. The Fed's web site has been up and down today. Chinese hackers?

[Fiat Currency]

Re: Hope and Fear – Part I: Year of Promise - Eric Janszen

I don't recall a quarter of robust growth when the Fed credited good weather. Surely the Weather Effect works both ways.

I get your point, and also chuckled when the Fed made its "weather" statement. It reminded me of some Business Review sessions we were doing once. The CEO literally yelled out loud "I'm going to throw my shoe at the next guy who says they missed their targets due to the weather!" I damn near spit coffee out my nose.

Far be it from me to defend the Fed ... but the answer to your question is Jan. 17th 2007 - FRB Beige book

Agriculture and Natural Resources
Most Districts reported upbeat agricultural conditions because of weather and high prices. Good weather conditions, which aided the sector, were reported by Richmond, Atlanta, St. Louis, Kansas City and Dallas.

http://www.federalreserve.gov/fomc/b...17/default.htm

BTW - Nice piece EJ, and some good comments from members here as well.

"It's tough to make predictions, especially about the future" - Yogi Berra

In the future I'll refrain from drawing conclusions from preliminary work.

FWIW - I appreciate the fact that you show up here to comment on stuff - even if some of your thinking is still preliminary. I do not find it difficult to discern the difference.

Business executives regularly make decisions with the best available information at the time. Sometimes better information shows up later, but its often better to get something 80% right and fine tune it later - than to be stuck in analysis paralysis for too long.