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Published for The Wall Street Journal, August 9th, 2010:
No serious economist thinks higher dividend and cap gains taxes are efficient ways to raise revenue. Why not limit deductions for high earners instead?
Friday’s weak employment report reminds us anew of the flagging U.S. economic recovery. While the Obama administration discusses additional stimulus packages, Treasury Secretary Tim Geithner is arguing that we should roll back key elements of the Bush tax cuts passed in 2001 and 2003. The administration is particularly skeptical about the benefits of today’s lower rates on dividends and capital gains.
The tax on dividends, for example, is currently 15%, but it could increase to as high as 39.6% if the 2001 and 2003 tax cuts expire. On top of this, a new 3.8% tax on investment incomes for high-income earners begins in 2013 to help pay for ObamaCare. The administration’s arguments for higher taxes on capital center on fairness and the need for deficit reduction.
These arguments are seriously mistaken. The relationship between investment, capital and wages is such that workers are better off if capital is not taxed at all.
Think of the economy as a pie split among workers, savers and the government, with the government’s slice fixed. The savers’ slice will equal the after-tax return on each unit of the capital stock, and what’s left goes to workers as after-tax wages. The fairness advocates in effect claim that low tax rates on dividends and capital gains increase the share of the pie that goes to high-income savers. But the low tax rates increase the absolute size of the workers’ slice by making the entire pie bigger. That’s because low tax rates encourage capital accumulation, productivity and wage growth.
As published for The Wall Street Journal on February 8th, 2010:
Tax increases can’t plausibly address the coming entitlement crisis.
Moody’s Investors Service’s warning last week that the AAA credit rating of the United States is in jeopardy raises fresh concern about the nation’s fiscal health. The question to ask about the president’s eye-popping budget, also rolled out last week, is whether it prepares the country for its future—or shackles it to past decisions that our leaders would rather not confront.
President Obama’s blueprint gave us a federal budget deficit for fiscal year 2010 of $1.6 trillion, about 10.6% of GDP. While one expects bigger budget deficits in a downturn, the administration expects the deficit and debt buildup to persist. By 2013, it forecasts that deficits will bring about a debt-to-GDP ratio of 72%, unprecedented in our experience except during a major war.
The problem is spending. Despite Mr. Obama’s words about restraint, the new budget proposes more spending—1.8% of GDP for 2011 to be precise—and a higher level, roughly one percentage point of GDP higher, in subsequent years.
Debates about the budget traditionally revolve around these numbers. There is another way to look at the federal budget, however, and that is to focus on its effect on our economic health, not just the government’s fiscal health. Focusing on economic health means setting our sights on productivity growth—our future living standards.
To understand what this means, consider the famous “kitchen debates” between Soviet President Nikita Khruschev and Vice President Richard Nixon in 1959 about the merits of capitalism and socialism. Nixon famously pointed to color television as a milestone in American innovation. The Soviet leader replied by trumpeting his nation’s lead in rocket thrust. The issue resurfaced in the televised 1960 presidential debates, when Sen. John F. Kennedy attacked Nixon for wanting to lead a nation No. 1 in color TV, but not in rockets.
As published for The Washington Post on November 13, 2009:
Congress recently approved $7.5 billion in aid to Pakistan for social and economic development. The bill incited controversy by requiring that the U.S. secretary of state report to lawmakers on whether Pakistan’s civilian government keeps effective control over its military, because many observers accuse some in the Pakistani military of having tolerated or even aided Islamic extremists since the 1980s.
But the bill itself should raise questions. After all, does Pakistan, or the U.S. Agency for International Development, or any other agency that will implement the aid actually know how to successfully spend these funds? In other parts of the world, especially Africa, foreign aid has been a spectacular failure in promoting social and economic development. This bill promises more of the same.
The United States has given Pakistan more than $10 billion in development aid since 1954. What has become of those funds? It certainly has not helped produce the kind of stability and prosperity that would help Pakistan offer its people an alternative to extremism. Nor has aid worked in Africa. Nothing indicates that an additional $7.5 billion will yield better results.
All, however, is not yet lost. It will take time to disburse and spend the funds, and there could be a chance to recast the support in a more promising way. There is even an example of effective large-scale aid on which to draw: the Marshall Plan of postwar Europe, which is still recognized as the most successful aid program in history.
As published on WSJ.com on May 6, 2009:
By R. GLENN HUBBARD , HAL SCOTT and LUIGI ZINGALES
Insolvent institutions should be taken over by the FDIC.
The results of bank stress tests — expected tomorrow — will no doubt prompt calls for further government guarantees and capital injections. But continuing to prop up the banks with government cash is a mistake. There is a better approach.
A well-capitalized banking sector is a necessary ingredient for effective intermediation and economic recovery. But today’s system is not well-capitalized. How can we move in the right direction?
In a market economy, the government can create the right incentives by using a combination of carrots and sticks. Thus far, the government has only used carrots with the banks. One major carrot is the Troubled Asset Relief Program (TARP). The initial infusions were very generous — the Treasury got back securities worth $78 billion less than the $254 billion it invested — as the Congressional Oversight Panel pointed out recently. In addition, the FDIC’s guarantee of short-term debt was worth $100 billion just for the original nine TARP-participating banks. And the mortgage-related asset guarantees offered to Citibank and Bank of America were worth tens of billions of dollars more.
