Synopsis: This article by The Economist suggests that taxing the rich is not the way for governments to alleviate their debt.

Click here to read the original article

Discussion:
While a popular opinion is that taxing the rich during times of economic trouble, this article encourages governments to think twice before doing so, pointing out unintended land negative consequences.  This article answers three questions:

1.     What share of tax do the rich actually pay?
2.     What has happened to the tax burden over the recent decades?
3.     What does the evidence suggest about how the rich respond to changes in taxation?

The rich pay a substantial amount of taxes nowadays (rich Americans pay the most of OECD countries, at 45%).  However, the general trend is that tax burdens have eased up on the rich; many countries have shifted from an extremely progressive tax scheme to a less progressive one-more proportional than anything.

Taxing the rich can be hazardous to an economy-often it is the rich that are most mobile, i.e. an increase in taxes means that the rich leave the country.

Overall, the article suggest that instead of simply increasing tax rates, closing taxation loopholes and broadening the tax base are more efficient ways to bring in income for the government.

Theory:

The phrase in the article “beneficial impact of tax cuts” can be very confusing. How is it that a government could possibly earn more tax revenue by cutting tax rates? The Laffer curve best explains this phenomenon. This is the Laffer curve:

The x-axis of this curve is the tax rate, while the y-axis is the revenue gained. It can be seen that the peak of this curve is not towards the end, i.e. it is not necessarily that as the tax rate increases, revenue increases. After a certain point, the revenue decreases. This is because more and more people will feel convinced that the tax rate is too high that they need to find a way to avoid the tax – whether that means moving their money to another country or not working altogether. At lower rates of tax, though, the effort of tax evasion might be too high; people might just pay the taxes just because it’s easier than avoiding it.

Notice how the highest tax revenue does not exactly mean a 50% tax; it could be anywhere, depending on the economy. It can also be multi-modal; it does not have to be restrained to one peak.

Synopsis: Should the U.S. invest in infrastructure now?

Click here to read the original article

Discussion:
This article argues that the U.S. government must take the opportunity now to increase public investment, before this fiscal climate changes.  The writer argues that the fear of increasing taxes to fund such projects is unfounded, as is the fear of slipping further into debt.  He or she cites examples of a boost in GDP due to such projects, covering and surpassing the debt caused.  In fact, it is with slow-growing economies that borrowing and funding is most profitable, due to low interest rates and minimal competition for loans.  It is for these reasons that the writer argues that the U.S. should invest in public goods – the economic climate is just right.  The only problem is what to invest in: while most economies can easily pinpoint deteriorating infrastructure, those projects may be a waste of time and money.

Key words:
Natural monopoly – This is where the lowest price can only be achieved if the market has a monopoly. The article gives three examples of natural monopolies:
“telephone network, electricity grid or sewer system.” The article goes on to explaining why it is best to have a natural monopoly – “fixed costs… are typically high and operating costs relatively low”.
Crowding in – This is the opposite of the crowding out effect, and is where government spending on public projects boosts the demand for a good, and so, increases the private investment in it.

For more on infrastructure and investment, read “Government Spending Booms Not So Great for Long-Term Growth” and “Bridges to Somewhere"

Discussion:
This article updates us on the economic health of the U.S. after the end of QE. While the author presents us with some encouraging statistics, such as an increase in employment and diminishing underemployment, other statistics are not as promising, such as a decrease in the labor force participation rate (LEPR) and stagnant wages.  My guess is that the discouraging statistics will turn around in time, e.g. these statistics are the result of time lag.

D.K. also contrasts the generally positive economic outlook of the U.S with that of the EU, where expansionary monetary policy may be needed. Mario Draghi, the president of the European Central Bank (ECB) is facing opposition from Germany, whose fear that expansionary monetary policy will result in hyperinflation stems from its past bad experiences with hyperinflation. It is worth referring to “Dwindling U.S. Inflation Casts Shadow”, which discusses the fact that, as opposed to hyperinflation taking place, there is minimal inflation at all.

Pay attention to the statement in the fourth paragraph that says, “… unemployment reaches a level where employers have to start paying more to find workers”. The nature of having to pay more is one of the steps in the Phillips curve, which suggests a link between unemployment and inflation, chiefly that as unemployment is lowered, inflation increases. This relationship is shown below (figures not based on real data).

We can notice now that, even though unemployment has lowered, inflation is not budging. Where did the Phillips curve go wrong?

We will discuss this in later blog posts.

Key words:
Unemployment – This is when those who are actively looking for work cannot find an
Underemployment – Where a worker can find a job, but it does not maximize his capacity. Examples would include those who are only able to find a part-time job, or perhaps an economist with a Ph.D. working as a bus driver.
Hyperinflation – This is when the rate of inflation accelerates, sometimes out of control. One of the most famous examples is in Germany from 1921-1924.
PMI – This is the Purchasing Managers Index and measures the economic health of the manufacturing sector.
LFPR – The labor force participation rate is the ratio between the labor force (those who have a job or are actively looking for one) and the whole working age population. So, those who retire prematurely, for example, are no longer part of the labor force, but are instead part of the rest of the working-age population.

One important analysis point about the LFPR is to do with the rate of unemployment. Let’s say the unemployment rate drops. Does that mean that more people are finding jobs? Perhaps. But it could also mean that people have given up looking for jobs and, in a sense, have retired prematurely. So, the unemployment rate has dropped, but so has the LFPR. The point to remember is that a lower unemployment rate does not equate to a better economic situation.

Synopsis: Is the whole notion of poverty traps exaggerated? Or is there some truth to the idea?

Click here to read the original article.

Discussion:
This article evaluates the recent statement that poverty traps are exaggerated. Instead of looking at whole decades or larger periods, e.g. 1960 – 2010, the author, C.W. looks at decade blocks and points out two main things to show that poverty traps are not a myth:

1. Living standards were exacerbated for the poor countries more that for the rich countries.
2. Any growth rates for poor countries would increase living standards for the rich and decrease them for the poor; i.e. income inequality has risen sharply.

For these reasons, C.W. believes that poverty traps do exist. The author elaborates by saying that while it is not true that long-term poverty traps will never be escaped, short-term poverty are the ones to worry about.