Brad DeLong's Semi-Daily Journal (2004)

No matter what the problem the economic policy remains the same, TAX CUTS. We survived 9-11 so we obviously "deserved" it.

It's not so much "risk" actually, as having enough extra cash in your pocket to give your friend's idiot son some, so he can maybe buy a baseball team, cash out, and run for governor.

Given the fact that Larry Lindsey is currently spending more time with his family, I think your time could be better spent thinking about other questions. I would waste my time some other way so here goes.

First it is clear LL will recommend a regressive tax cut. He always does. The question is why the corporate income tax not double taxation of dividends or the top income tax bracket.

struggling, I can imagine he might advocate a cut in taxes on profits or dividends but not general income of the rich because he connects general fear of risk and the risk premium on stock (remember his free lunch plan). That's the best I can do at understanding LL thought.

What LL said is crazy. His evidence is that a few sectors have been very hard hit. Airlines etc were not about to earn profits and would benefit not at all from a cut in the corporate income tax. A reasonable response to a severe temprorary sector specific shock might conceivably include loan guarantees or even direct cash grants but not cutting the taxes of corporations in other sectors.

'Seriously, they would be perfectly happy to simply herd off into camps, all the "excess" population and reprocess them into bars of soap and mine the gold teeth.'

There was no soap made from the fat of Jews in the Holocaust. It's recognized by all Holocaust experts. It's a ridiculous idea, anyway: where do you get fat from an emaciated corpse? You don't.

Says alot for what LL learned while he was at Harvard. How come Brad learned how to work through the analytics and he didn't?

Completely result-oriented BS on the part of Lindsey.

There was no hint of an increasing reluctance to take risks -- not even the most minimal kind, such as the risk of living in the fallout from Ground Zero.

I live in downtown NYC and one of the things I heard people say after 9/11 (usually only after expressing heartful sympathy for the victims, so as not to appear too crass) was, you know, I really want to buy a Tribeca loft as soon as the prices drop. This was while everything below Canal was still barricaded and off-limits by the U.S. army, mind you. After I heard this sentiment expressed for about the sixth time, without ever once hearing that anyone wanted to sell because of 9/11, I started reminding these people that if everyone wants to buy, and no-one wants to sell, ya know what?

The price doesn't go down.

Nor did it. Tribeca is more expensive per square foot than ever.

Speaking of "post 911" idiocy:

Isn't it refreshing to see all those IAEA inspectors swarming all over Pakistan?

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U.S. to Designate Pakistan a Closer Ally, Powell Says

March 18 (Bloomberg) -- The U.S. will designate Pakistan a major ally outside the North Atlantic Treaty Organization, U.S. Secretary of State Colin Powell told reporters at a news conference in Islamabad, Pakistan's capital.

The Bush administration will advise Congress it intends to ``designate Pakistan as major non-NATO ally for the purposes of our future military-military relations,'' Powell said. The U.S. appreciates Pakistani efforts against terrorism, he said.

The move will boost military cooperation, giving Pakistan more access to U.S. weapons...

http://quote.bloomberg.com/apps/news?pid=10000080&sid=aU.Wk4k01hyE&refer=asia

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I mean, it's ABOUT time. Don't you think?

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Treat Iraq, N. Korea the Same: Nonmilitary Means Can Work

By Stansfield Turner

Los Angeles Times, November 1, 2002

In responding to North Korea's confession of nuclear perfidy, we are missing the bigger picture.

The issue is not whether North Korea or Iraq is the greater threat to us today. It is that we have every reason to believe both countries are striving to acquire nuclear weapons. Both should be stopped cold, not just for what they might do with such weapons but for the precedent it would set for other would-be proliferators.

Back in 1990, the United Nations Security Council agreed that it was important to denuclearize Iraq. It forced a highly intrusive inspection-and-destruction regime on the Iraqis, an unprecedented interference with a sovereign nation, in the name of preventing nuclear proliferation. That regime, unfortunately, was allowed to lapse in 1998.

Why is it any less important today? Should not the Security Council be even more concerned, in light of North Korea's admitted effort to acquire nuclear weapons? Or is the world community going to give up on preventing the spread of nuclear weaponry?

If the Security Council or some other group does not reinstate the inspection/destruction regime in Iraq and begin one in North Korea, a moment of opportunity may pass.

Rather than debate whether we should deal with Iraq through war and North Korea through diplomacy, we should insist on the same treatment for both...

http://nucnews.net/nucnews/2002nn/0211nn/021101nn.htm#010

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P.S. Shhhhhhh!

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THE THIRD TEMPLE'S HOLY OF HOLIES:
ISRAEL'S NUCLEAR WEAPONS

Warner D. Farr, LTC, U.S. Army

The Counterproliferation Papers

This paper is a history of the Israeli nuclear weapons program drawn from a review of unclassified sources. Israel began its search for nuclear weapons at the inception of the state in 1948. As payment for Israeli participation in the Suez Crisis of 1956, France provided nuclear expertise and constructed a reactor complex for Israel at Dimona capable of large-scale plutonium production and reprocessing. The United States discovered the facility by 1958...

http://www.fas.org/nuke/guide/israel/nuke/farr.htm

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THIS is STRICTLY 'confidential' stuff...

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Israeli Nuke Whistleblower Won't Say More - Family

Thu Mar 18, 5:43 PM ET

By Dan Williams

JERUSALEM (Reuters) - Nuclear whistleblower Mordechai Vanunu will not spill any more secrets on his release next month after serving 18 years in solitary confinement for treason, relatives said on Thursday.

Prime Minister Ariel Sharon ordered Vanunu closely monitored when he goes free on April 21, citing concern he will discuss his past work at Dimona atomic reactor -- the subject of a 1986 British interview for which he was abducted home and tried...

http://story.news.yahoo.com/news?tmpl=story&cid=586&e=6&u=/nm/20040318/wl_nm/israel_vanunu_dc

It is the "hot dog stand model". A guy has 10 hot dog stands. One of them is wiped out in the WTC collapse. The hot dog stand guy does not replace it because another building might fall on his new hot dogs. The government gives him a tax break. It is now possible to buy insurance and make money. They hot dog stand guy replaces his hot dog stand.

Lindsey's politics learned at hot dog stand (Financial Times)
http://tinyurl.com/3cv8

Lindsay's logic seems fairly reasonable to me. 9/11 would (and did) lead to a big increase in the credit spread and a dispearance of the non-investment grade debt market which must have something to do with risk aversion. Since many firms would have to pay a high premium for external finance or not be able to get it at all, the only way to finance new investment is cash flow. How can the government directly increase cash flow? How about a temporary cut in corporate taxes.

Of course, one could argue that there was such a big capital overhang from the Rubin bubble that no amount of cash flow would boost investment spending.

the sad thing was Larry Lindsey was a pretty good Fed governor. I don't know why made such a pig's breakfast of his job as economic advisor. Take yourself back to early 2001, where everybody thought (wrongly, as it turned out) that the Bushies had 2 trillion dollars to play with. Imagine if they had passed a "health care tax cut", where people who don't have insurance get the money they need to buy insurance, and people who already have insurance get a nice tax cut . If they had done that, wouldn't Bush be assured of reelection?

Why didn't they do that? Now they've blown their wad, with nothing really tangible to show for it, and a 500 billion deficit to boot. And the chief blame lies, I think, with Rove and Lindsey, who were perhaps the only ones with the brains and the access to push such a policy through.

Lindsey's diagnosis of the post-911 *problem* is not crazy. In fact, its just textbook Keynesian "animal spirits" stuff. Where he goes off into Cuckoo land is his proposed soluion: that a small cut in the marginal rate paid on corporate income wil somehow induce risk-averse businessmen, already sitting on a great deal of cash, to spend money. I honestly don't know what Lindsey could have been thinking.

To Cook.

Cash flow could be increased in many ways. For example temporary co co payment of FICA (subsidizing employment) or an investment credit. Cutting the corporate tax seems to me a very bad way to get cash to liquidity constrained corporations. It sends cash to currently profitable corporations.

After 911, many perfectly sound corporations had severe temporary cash flow problems, but they had temporarily negative profits so the Linsey plan wouldn't send money to them.

Shorter LL + JC

"There has been a huge temporary sector specific shock and no one wants to buy junk bonds right now so some firms have a cash flow problem so lets give money to different firms"

Real problem -> crazy proposed solution.

Rubin was not secretary right up to the end of the bubble. You might say Summers should have done something about irrational exuberance but it didn't happen on Rubin's watch.

So what does LL tell us about Harvard ? The point you have to get is that 2 Harvard "assistant professors" are not real professors, but rather guys doing the dirty work of administering teaching undergraduates (the head tutor and the Ec 10 coordinator). LL was ec 10 coordinator, basically Feldstein's head teaching assistant.

Now at least unreal Harvard professors is an absolute geniuses whose genius was not recognised by narrow minded Harvard full professors. However LL has the soul and brain of a teaching assistant.

Dave,

I don't see anything wrong with your argument, by itself, but it is not Lindsy's argument. Lindsey wanted this to be a risk problem. That, as Brad notes, is not something that is addressed directly with a tax cut. In the face of risk, banking the tax cut and making no change to investment and hiring plans is a reasonable choice.

'Why is a temporary cut in corporate income tax rates a way to "attack the new risk aversion directly"?'

Oh that's easy. The frighten capital is hiding under the bed. You push more money under the bed, it get's so crowded in there that some of the captial is forced out the otherside.

See?

That money could be used to buy a bigger bed to hide under.

One of the very first things to be cut during corporate belt tightening is employee travel. Why send an employee to a conference for career development if you might have to lay them off? One employee on the phone can make more contacts in a day than 5 employees stuck in an airport. However, there are certain gains from face to face meetings that do not always happen over the phone. If money is available, companies will splurge on more face to face.

Lindsey believes that the travel cutbacks are temporary and an initial response by corporations looking to cut costs. Corporations would prefer face to face but are opting to restrict travel as general belt tightening. He believes that if the companies have the extra cash, they will use it on travel to get the added advantage. Under these assumptions, a tax cut that would give companies more cash would help.

OTOH, Rubin sees a structural change in the way companies do business that is irreversible an avalanche beyond the reach of government to stop. The strategy is to get out of the way and repair the damage once it stops. Rubin who works in the corporate world is witnessing first hand the replacement of travel with internet, video conferencing and other technology. In his mind, these changes were already occuring prior to 911 and now the change was going to complete more rapidly.

In our 20/20 hindsight, we can see that Rubin was correct, (structural changes have taken place) and Lindsey was wrong because he thought permanent structural changes were temporary and reversible.

The other problem that Lindsey wants to address but Rubin and AG do not is stock prices. Corporate income tax breaks would improve after tax earnings and therefore stock price. This is an important concern for the Bush supporters.

Actually I believe there is a shred of reality in LL's proposal. If you assume that companies express their risk aversion in lowered expectations of revenue impacts of investments, then these investments become less attractive and many will not be made. One way to make these marginal investments more attractive is to lower the tax on the marginal income generated by the investments. If youn lower the tax rate in an NPV calculation some previously unattractive investments will have their return turn positive and hence become attractive. Attacking the consumption side makes more sense to me, but LL is not totally insane or mendacious here.

It's possible that another important angle on this relates to the point made by Kevin Phillips, that Bush, because of his family, connections, and background, tends to see pretty much every economic policy question through the prism of the concerns of the investor class. That's the most salient difference between Rubin's and Lindsey's solutions - the former thinks in terms of mostly middle- and low-income consumers, who will, as everyone acknowledges, spend most of what they get in a tax cut. Lindsey jumps immediately to the conclusion that risk-aversion (read: a reluctance of investors to invest) is the main problem, even though the picture seems to have been a lot more complicated than that.

Anyway, just another little bit of context for Lindsey's view, which, needless to say, I think was pretty off-the-mark.

" Bush, because of his family, connections, and background, tends to see pretty much every economic policy question through the prism of the concerns of the investor class. That's the most salient difference between Rubin's..."

I would think it is exactly backwards. Bush is a hands-on investor, as was his father. Both were small businessmen. Rubin is full throat Wall Street.

Yoshi Tsurumi (Professor of International Business, Baruch College, the City University of New York )remembers George W. Bush:

"At Harvard Business School, thirty years ago, George Bush was a student of mine. I still vividly remember him. In my class, he declared that "people are poor because they are lazy." He was opposed to labor unions, social security, environmental protection, Medicare, and public schools. To him, the antitrust watch dog, the Federal Trade Commission, and the Securities Exchange Commission were unnecessary hindrances to "free market competition." To him, Franklin Roosevelt's New Deal was "socialism." Recently, President Bush's Federal Appeals Court Nominee, California's Supreme Court Justice Janice Brown, repeated the same broadside at her Senate hearing. She knew that her pronouncement would please President Bush and Karl Rove and their Senators. President Bush and his brain, Karl Rove, are leading a radical revolution of destroying all the democratic political, social, judiciary, and economic institutions that both Democrats and moderate Republicans had built together since Roosevelt's New Deal."

http://www.glocom.org/opinions/essays/20040301_tsurumi_president/

Born on third and thinks he hit a triple!

Did W have any real success as a businessman? Oh yeah, Harkin. Martha Stewart is going to jail for stuff like that.

Both Bush and his father participated in multimillion-dollar deals; how 'hands-on' their approach was strikes me as pretty irrelevant. The distinction between that and Rubin's more overtly 'Wall Street' background seems like little more than hairsplitting.

However, I do take the point that background doesn't completely determine economic policy views; Rubin's example does prove that much. Bush could have worked to transcend the limitations imposed by his personal history - he was just too intellectually lazy/disengaged to do so.

I'm going to have to get another wheelbarrow for my rose fertilizer. My present one has worn out under the load.

From the first post:

"Seriously, they would be perfectly happy to simply herd off into camps, all the "excess" population and reprocess them into bars of soap and mine the gold teeth."

Apologize. Now.

Now on to the supply-side cult. Like their vulgar Keynesian counterparts, these people take a kernel of truth (taxes distorting decisionmaking) and ignore a bunch of other stuff like long-run adding-up constraints on debt(transversality conditions). I'll chalk this up to ignorance since this is the sort of thiking that taking econ 100 but not econ 200 will encourage. There's also a time consistency problem of wanting to leave debt to the next administration. Starving the beast doesn't seem to work though.

Likewise with the vulgar Keynesians. This is also based on a kernel of truth (government intervention maybe increasing GDP during slack times). But these folks have no good model of the labor market and sidestep the idea of dynamically optimizing agents completely. In my view, they also prematurely assume strange things about consumption functions, like poor people consuming more of their marginal income than rich people and hitting Bush over the head for this. Uh, that doesn't fit the facts. Something resembling the permanent income hypothesis is probably closer to the truth.

Anyway, when most volatility in GDP comes from investment and inventories I think it's silly to try to jack up consumption. Sadly we still don't understand very much about inventories or even about unemployment dynamics. Optimistically, I see some good future areas of research for macroeconomists.

Patrick,

If one looks just at background, then one might expect that Rubin would be straight Wall Street, while the Bush clan would see things less from the investor perspective. If one looks at their policy behavior and public comments, however, Phillips' views seem right. Phillips has also put in a reasonable amount of time on the Bush family, though that is not a perfect shield against error.

I see Kerry has just come out in favor of amnesty for illegal aliens. There goes a few million votes. . .

Actually, offering corporate tax breaks immediately post-9/11 did help to prop up the economy. General Motors Corp. probably wouldn't have introduced its "Keep America Rolling" incentive plan without a tax break in return (which it did get). This move by one of the nation's largest corporations helped alleviate the economic repercussions of the terrorist attacks.

jhe said: "One way to make these marginal investments more attractive is to lower the tax on the marginal income generated by the investments. If you lower the tax rate in an NPV calculation some previously unattractive investments will have their return turn positive and hence become attractive"

I see that, but I still have a hard time understanding the effects on risk calculation of "temporary" cuts in corporate taxes. The temporary part especially. And, to me, the bond markets are telling us that the supply side help is maxed out.

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" Since many firms would have to pay a high premium for external finance or not be able to get it at all, the only way to finance new investment is cash flow. How can the government directly increase cash flow? How about a temporary cut in corporate taxes."

It could also do what the fed did, flood the world with liquidity. It could also make credit more available by selling bonds on a yield curve to push down short term interest rates.

The corporate tax cut about as effective at dealing with the stated problems as just loading up dollars in to b-2 bombers and dropping them on NYC.

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