Would someone please please *please* explain to me how monetary policy could become ineffective? So what if the Fed Funds rate drops to 0%? They can go on and monetize long-term government debt. We have plenty. Could SIX TRILLION DOLLARS possibly be insufficient?

I heard some pundit on CNBC respond to this question by saying that the central bank could create new money but couldn't force people to spend it. Great. In that case, the Fed should let the presses roll because there's no risk of inflation. After all, money can't cause inflation if nobody will spend it, right?

Let's say that somehow Americans truly *don't* spend that new money. The Fed wipes out the national debt and Americans just hoard the trillions of dollars under their mattresses (does this sound ridiculous yet?) If that happens, the Fed should give new money to Congress. We know *they'll* find a way to spend it.

What am I missing here? Do they think that somehow new money could cause massive inflation without increasing aggregate demand? Stagflation with an output gap of something like half a trillion dollars? Output gaps are deflationary, right?

Seriously, why won't they just throw money at the economy until the output gap closes so I can get a fucking job?

Brad,
In your dividend distribution table could you explain what the tax cut column and the net tax cuts column represent? I can only guess at what the net tax cuts column represents, and I am completely flummoxed by the tax column.
Bob Kirchner

Is the proposed dividend tax change really (the most) effective in shifting corporate financing from debt to equity? A change that affects stock holders rather than corporations doesn't seem like much of a motive for change in corporate behavior. Maybe I didn't read the proposal closely enough.

Patrick -

If the fed continues to inject reserves into the sytem after the fed funds rate went to zero, all that would happen is that bank's reserve accounts would get larger and larger. The money that you and I spend is primarily bank money, created when banks make loans. If banks don't wnat to make loans or business and consumers don't want to borrow, the fed can't really do anything. The Fed, despite what you hear, does not control the money supply - it controls (to a degree) the rate of growth of the money supply.

I think of the fed as a skinny guy walking a St. Bernard: by pulling hard on the leash, he can slow it down; by easing up, he can allow it to speed up. But if the damn dog sits down in the middle of the street and refuses to move, there ain't a whole lot he can do about it...

>>They can go on and monetize long-term government debt. We have plenty. Could SIX TRILLION DOLLARS possibly be insufficient?<<

The Bank of Japan has been terrified for a decade that monetizing government debt will produce a lot of inflation without boosting output by much. The impression I've gotten is that the Federal Reserve thinks that the BOJ is wrong--that monetary policy does retain a great deal of power to boost output without causing high inflation even when short-term nominal interest rates are near zero--but they would rather not try the experiment...

Joe Stiglitz would also say that even driving longer term rates to zero wouldn't necessarily boost investment by much if people were uncertain of the soundness of the financial system...

in the first bullet, you have a typo: "is are only choice".

Brad-

Could you explain your thoughts in the last point? Normally, the idea is that firms borrow through debt since it is classified as an expense while dividends are not, so the corporation pays taxes on dividends it distributes. But the Bush plan cuts the individual's taxes, not the corporation's. So are you assuming that corporations are going to start issueing more dividend paying stock than they currently do, and this means more stock returns will be based on dividends than on capital gains. So shareholders will be less worried about new stock issues diluting the value of their stocks? But this seems secondary at best, since shareholders will still want a high stock price.

Actually, the only good thing from the plan I see is that it will encourage more firms to pay dividends, improving corporate governance.

The actions of the Bank of Japan haven't made sense to me for some time now. BUT.

Given their current circumstances, I don't understand how the BOJ can believe that monetizing intermediate-to-long-term government debt will produce a lot of inflation without impacting (real) output much. Deflations are self-reinforcing cycles as consumers wait for lower prices to spend, and so aggregate demand decreases faster than aggregate supply, so prices go down more and consumers wait more . . . . and in a deflation, the real cost of corporate borrowing and carrying inventory is HUGE, so there's incentive to underproduce even the falling levels of demand.

Monetizing some of the long-term debt and causing some inflation is the best way to break the deflationary spiral by making goods cost a little more in the future. Once that happens, consumers come out of their savings bunkers and start spending more promptly - AND THEN since it's profitable to borrow, invest in real assets and produce stuff, companies start rolling again.

People/corporations will spend/invest money
when they have confidence in the future.
The interest rate could be 0 and taxes could
be very low, if you don't see a future need
for it you won't borrow. Currently with the culture of war in the land there is too much uncertainty to feel confident in the future.

There were a couple of Bloomberg headlines, smack up against each other, that scream "big problem". Thought I'd share them. The are --

"Bush Plan Deficits May Raise Borrowing Costs"

"Bush Plan Unlikely to Boost Near-Term Growth"

I understand that Bloomberg headlines do not constitute the latest, best thinking in public finance. However, since they reflect the thinking of people who make investment decisions (the class of people Bloomberg reporters like to quote) and may influence the thinking of the same group of people (financial institutions are Bloomberg's core customer), there is reason to think the expectations of an important class of economic agents may be represented here.

No near-term stimulus, but higher borrowing costs -- such expectations look like a problem for a stimulus plan.

Brad,

I second Bob's request. Could you please explain what the headings on the last two columns signify? Thanks.

Brad, and anyone else with access to a university library: I'd thoroughly recommend looking up the paper "Endogenous Cycles in a Stiglitz-Weiss Economy" by Oren Sussman and Javier Suarez, published in the Journal of Economic Theory, vol. 76, nº 1, 1997, 47-71. I read it in a working paper version in 1995 and it's stayed with me ever since. It's a fantastic little model, and I personally think that something like it describes what's been going on over the last five years. If I can find my dog-eared copy at home, I'll try and do a bit on it for my own weblog.

I keep hearing about the high portion of federal income taxes that the wealthy pay. This may not be the proper place to ask but has anyone seen a distribution table with the following column headings:

Proportion of tax payers

Proportion of total income earned

Proportion of total federal taxes paid

Proportion of total federal income and and payroll taxes paid.

Shouldn't the argument be over which of columns 3 & 4 should be equal to column 2?

I keep hearing about the high portion of federal income taxes that the wealthy pay. This may not be the proper place to ask but has anyone seen a distribution table with the following column headings:

Proportion of tax payers

Proportion of total income earned

Proportion of total federal taxes paid

Proportion of total federal income and and payroll taxes paid.

Shouldn't the argument be over which of columns 3 & 4 should be equal to column 2?

I keep hearing about the high portion of federal income taxes that the wealthy pay. This may not be the proper place to ask but has anyone seen a distribution table with the following column headings:

Proportion of tax payers

Proportion of total income earned

Proportion of total federal taxes paid

Proportion of total federal income and and payroll taxes paid.

Shouldn't the argument be over which of columns 3 & 4 should be equal to column 2?

Bob, sw -- If I can attempt an explanation, "Tax Cuts" are the average annual tax cut received by taxpayers in the brackets as described in columns 1,2,3, under the Bush plan, until we pay for the Bush plan.

"Net Tax Cuts" are the corresponding figures after we pay for the Bush plan (assuming the burden is flatly distributed). The Bush plan is a deficit financing plan, we (the US) have to borrow to pay for our tax cuts, and we (the taxpayers) have to pay eventually to retire or service the additional debt ... nobody is going to do it for us.

Or are they? That's the argument a proponent might try to make: that the Plan gives our economy such a tune-up that all our incomes rise more than enough to offset the price we'll pay when the piper comes calling. (But we -- somebody -- still pays that price, as indicated in Brad's table column 5 ... just possibly out of a higher income.)

A question... I have seen a great deal being made of the point that working-class 401(k) investors will not gain any advantage from this, that all the benefit goes to those who have invested directly in dividend-yielding stocks. I understand this, but the thought just occurred to me: aren't a lot of those stocks owned by institutional investors like pension funds?

How will that effect play out, and how will it affect the interests of the people whose pensions are at stake?

well, the direct benefit goes to taxable investors who own dividend-paying common stocks.

the 401K's and IRA's and institutional pension plans are in the same boat: they're already tax exempt, so their dividend receipts don't change.

however, to the extent that the change in tax policy boosts the overall stock market, and there are complex reasons to suspect it might, then everybody benefits . . . . .

as for the security of defined benefit pensions, those are already guaranteed under ERISA by something called the Pension Benefit Guarantee Corporation (PBGC). if the tax change boosts the stock market, it would make the PBGC very happy, and would also please corporate America, whose pension plans have gone from being overfunded to underfunded in a short time (note: underfunded is very different from insolvent).

Anarchus -- Again, dividend-paying stocks will be more valuable to taxable investors than non-taxable investors. It is not rational (in most circumstances) to continue owning something for which someone else is willing to outbid you. Ergo, non-taxable proprietors [individuals / plans / institutions] should not own dividend-paying stocks.

(Just as one should not hold tax-free muni's in a tax-free account.)

Brad DeLong presents an analysis of the Bush tax cut based on a static snapshot of current taxpayer behaviors. This is a classic and elementary mistake in economic thought because it assumes taxpayers will not respond to the incentives created by the plan. For example, DeLong maintains middle-class people will not benefit because their dividends are already tax-sheltered. But middle-class persons will be able move their non-sheltered investments into dividend paying stocks to avoid taxes by taking advantage of the now untaxed dividends. Hence the simplistic static analysis presented by DeLong is flawed.

A more nuanced analysis would try to account for the changes in corporate behavior as well as taxpayer behavior. DeLong does mention possible changes in corporate borrowing behavior. RonK makes interesting point about decreased ownership of dividend paying stocks by non-taxable entities. The manifold effects may not fit into the schematic class-warfare presentation that DeLong finds ideologically palatable.

Brad DeLong presents an analysis of the Bush tax cut based on a static snapshot of current taxpayer behaviors. This is a classic and elementary mistake in economic thought because it assumes taxpayers will not respond to the incentives created by the plan.

So you think the bottom 96% of tax payers will start investing enough to make up for them getting only 25% of the tax cut? That's one hell of a behavior change.

For example, DeLong maintains middle-class people will not benefit because their dividends are already tax-sheltered. But middle-class persons will be able move their non-sheltered investments into dividend paying stocks to avoid taxes by taking advantage of the now untaxed dividends.

If everyone moves their money into the new untaxed assets in mass, what makes you think the price wouldn't go up by a proportional amount? After-tax returns should remain equal for assets of equal risk and performance, unless we've repealed the laws of supply and demand.

Jason McCullough asks "If everyone moves their money into the new untaxed assets in mass, what makes you think the price wouldn't go up by a proportional amount?"

McCullough's comment actually raises another problem with the static analysis provided by DeLong. It is possible that there will be a rally in the prices of dividend paying stocks. Yet, recall, DeLong asserted that middle-class people will not benefit from untaxed dividends because their dividends are already tax-sheltered. But, of course, they will benefit from any rise in prices of the stocks in their tax-sheltered portfolios. The prototypical class-warfare counter-argument would be that the wealthy would benefit even more than the middle-class or poor from such a stock rally. Reductio ad absurdum, any attempt to rally the stock market is a nefarious scheme of reverse wealth distribution.

In any case, a more even-handed and non-static assessment of the proposed dividend tax cut would attempt to take into account changes in stock prices due to changes in taxpayer and corporate behavior. Admittedly this is a tough task, but assertions about how middle-class people would be effected by the tax cut are incomplete without trying.

Garson: OK that a "dynamic" analysis is always better. But just curious: is the estimate of the cost to the Treasury provided by the Administration "static", i.e. often these things end up costing more than the estimates because they don't take into account the behavioural change you're mentioning.

Also just curious: are you ok for the dividend cut so long as income tax is increased on top earners to help pay for it? Or is that - gasp - class warfare?

Garson, lets turn a couple of those class-warfare cards face up.

First, which percentiles have more market-speculative chips in the taxable piles? (Granted, the top tenth of a percentile excels at moving their active-venture chips into nontaxable piles.)

Second, until (and if) existing equity structures re-structure themselves into "pure plays" [a process that could take decades if it occurs at all], it seems likely teh market clearing price for security X will settle somewhere between the rational discount price for lower-bracket individuals and the r.d.p. for upper-bracket individuals. This implies a "consumer surplus" effect in favor of the uppers (who would be willing to buy the same "goods" cheaper -- but don't have to) and adverse to the lowers (who will pay above "final equilibrium" price for their share of a mixed bag).

... or so it seems to me at this juncture, lacking the data based scientific simulation apparatus to conduct a more nuanced analysis.

It is possible that there will be a rally in the prices of dividend paying stocks.

Notice that this is a bad thing for dividend paying stocks. You know how bond yields go down when bond prices go up?

i'm looking for the specific source (i.e. publication, date) of the quintile information. any help on that front would be greatly appreciated.