1. There is a segment of the population that is as unhappy with economists as they are with bankers, the Congress, the executive branch, or the judicial branch, for that matter. I understand that, for people not trained in economics, economic issues can be very difficult to sort through. The difficulty is acute, in part, because the stakes are so large. Governments and central banks have the ability, through their actions, to reallocate resources in ways that favor some segments of the population relative to others. Economists (or so-called economists - you don't need a license to call yourself one) are quite willing to sign on (explicitly or otherwise) with political parties to make the case that particular policies are somehow good for everyone (in the sense of being "good for the economy" or economically efficient), when the truth is that what they are advocating has more to do with reallocating wealth and income to their base of support. Republicans do it. Democrats do it. The result is that, at any time, one can find economists, some with excellent credentials, including Nobel prizes, giving what appears to be conflicting advice. How could the average person sort out this noise? I have no particular advice to offer, other than to educate yourself. Take an economics course, read, and think.
2. Some people are scary. You know the ones I mean.
3. I got a well-reasoned reply from someone who was actually at the financial crisis workshop, which was this:
Anonymous said...1. It is a difficult to interpret what Ed was saying, as he was not specific enough, and certainly didn't lay out an explicit model. One thing I did not mention was the discussion of intangible capital, which relates to this paper. This may relate to the capital taxation arguments this commenter makes.
I won't claim to speak for Ed, but my understanding of the third point is a bit different than yours, Steve. I don't think he really believes that expectations of higher future taxes are depressing labor supply. As you noted, this seems a bit ridiculous. But it does seem reasonable to think that expectations of higher future taxes are depressing private investment, which as you pointed out from Bob Hall's remarks, is one of the major components GDP that is suffering right now. It seems clear that the federal government has borrowed and spent a significant amount over the last 24 months or so. And we have some big obligations looming on the horizon as well (ongoing war costs, social security, and health care, to name a few). Our national debt isn't going away anytime soon, so we either have to cut spending (not likely), monetize the debt (I doubt the Fed will allow for significantly higher inflation), or see higher taxes sometime in the future. The latter seems most likely. If nothing else, it seems we're going to see at least some tax increases as the Bush tax cuts expire. It's clear that taxes affect return on investment, and business unsure of future tax rates might be less willing to make risky investments because of that uncertainty. That was my take on Ed's argument, and it seems reasonable. Let me know if I'm way off base here.
2. Whether it's anticipated labor income taxes or capital income taxes, it seems very difficult to make the case that this could be driving this large recession. We have known about the government's obligations (defense spending, health care costs, social security) for a long time now. I don't know how you make the case that the weight of these obligations somehow came home to roost in fall 2008. In terms of the actual outcomes, as Hall noted in his talk, the size of government (that's total - federal, state, and local) has not increased recently. As well, the February 2008 stimulus package included $275 billion in tax cuts. I'll leave it to someone else to determine the tax implications of the health reform bill - that one is debatable. As the comment notes, there are serious budgetary problems at all levels of government in the United States. The state governments (and this is particularly acute in Illinois and California) are forced to face the problem in the present, but ultimately the federal government will have to face the reality of its present-value budget constraint (i.e. debt is debt - the government has to ultimately find a way to pay it off). But I don't think any of this helps Prescott make his case.
3. Prescott never addressed issues related to the housing market, which is central to the conventional narrative on the financial crisis. My view of this is the following. Incentive problems in the mortgage market caused us to accumulate a large stock of housing capital, essentially on false pretenses. On top of that stock of housing capital was built a structure of collateralized credit and asset trading that was supporting a significant fraction of aggregate economic activity. Housing prices fell because the reality of the false pretenses became apparent to people who were engaged in the financial trading supported by the false-pretense-housing. Now that the false-pretense demand for housing has gone away, we are not going to be building many houses for a while, and financial markets are having to restructure themselves, by finding other ways to support credit activity than through the construction and trading of mortgage-related securities. If we are going to address issues related to capital taxation, we should think carefully about how we treat the housing sector in the US. This sector has been heavily subsidized, for no good reason, through the mortgage interest tax deduction, Fannie Mae and Freddie Mac, and through the recent activities of the Federal Reserve System. Note that this is a pure consumption subsidy, of the flow of consumption services from housing. The subsidization diverts resources from productive investment, in part by making credit more costly for firms investing in plant and equipment.