1) there is a 0% chance of old age entitlements getting cut. I think this is self evident and won’t list the reasons
2) republicans should stop wasting political capital on #1
3) if #1 means bankruptcy, then the goal of the republican administration should be to determine who it’s friends are and who it’s enemies are and transfer as much money from enemies to friends before bankruptcy. Believe me, the other side is doing the same.
I mean friends in the broad sense (middle class normie families) and not the narrow sense (defense contractors or whatever)
4) when I say transfer I mean transfer. The least damaging form of government spending is writing people checks, the most damaging letting leftist beuracrats spend money. I would plow everything into a gigantic child subsidies, especially those that favor married middle class families with lots of kids. I would try to find students instead of systems in k-12
After all, those kids are the ones that have to dig out post bankruptcy
5) since 2000 it seems to me that “one off” spending of “crisises” vastly outstrips whatever changes to the run rate you could squeeze out of legislation. It matters who is in power when the next “crisis” comes
A good example of hurt enemies help friends is trump ending the salt deduction (helps wealthy blue state progressives and subsidized bloated state budgets) and using the money to increase the standard deduction (helps middle class families and is simple and doesn’t subsidies anything specific).
I would make each child add to the standard deduction in addition to the tax credits
1) Increasing the minimum distribution rate from foundation endowments 2) occupational licensing reform 3) mandatory return to office for government employees 4) relocating government employees away from state capitals and DC 5) raise the cap on the maximum income share that borrowers should pay in income based student loan repayment plans 6) reduce social security taxes for each kid you have.
Each of these are more true than the GOPe-ish stuff Arnold linked to, especially the part of #3 to increase gov't benefits to those in the responsible middle class.
With HS. (how about $10k prize at age 18 or after for passing a GED or HiSET test).
Married. (A $1k first anniversary prize after first year; a $5k at 5 years; $10k at 10, 20, & 30 years)
With kids (like #4 BIG child subsidies, ~$10k?/yr, for each married bio-parent or only one if only legal guardian parent.)
>>"taking on entitlement spending is no more popular today" ... than for decades <<
Right.
And it won't ever become popular because society is getting richer AND life is unfair. So Reps, or Dems, who want to be elected need to give up massive reform, instead focusing on capping the top rates so as to be about the median IRS reported wage (~$62k last year). People at or above that median wage are not poor - tho many would be happy to vote for more benefits for themselves.
End tax-exempt status for colleges that have been discriminating against hiring Republicans (& pro-life folk).
Cap salaries of non-profit organizations to be some 1.5 or 2.0 x median income - so the most an NGO president could get would be $124k. Alternatively, put high and increasingly higher "surtax" taxes on payments made above the median level. They want "moral superiority", as well as lots of cash & status. Reps should be reducing the cash such do-gooders are getting.
Few bishops or priests or ministers are making more than that, personally - and I don't think they should.
Deregulation, austerity, and non-interventionism -- "Stop doing something!" -- are the keys, but insiders, stakeholders, and hawks are entrenched. All other reform ideas are at the 3rd decimal.
"There is a great deal of ruin in a nation." - Adam Smith
Republicans who want fiscal austerity should try to target spending growth that is lower that nominal GDP growth but higher than zero. Nominal growth in government spending that is a shrinking share of the economy achieves many (all?) the same goals: shrinking role of government, lowering debt service costs, protects borrowing capacity for emergencies, and probably reduces inflation. But spending growth below NGDP growth does so without the painful short term adjustment that could disrupt the economy and would make for a brutal political fight.
They did this in Canada and we could do it here too.
Nothing will be done, and everyone of those people know it. The only way to true reform is through collapse of the present systems. The best outcome might be the systems collapsing one by one and being rebuilt smarter and more efficient, but it isn't what I expect to actually happen. We will run it all into the ground. My only real hope at this point is that it limps along beyond the horizon of my own life.
Leadership: Let’s simply start with a competent pragmatic president and leadership in Congress regardless of which team they come from. Then we can implement first principle programs (simply copy the playbook from Singapore).
Keeping inflation at zero is impossible--one has to control both the supply of money and the demand. The latter is impossible to control. Some inflation is better than some deflation, so I can go along with a 2% target. 1% might be better. But in any case greater than zero.
Apart from that, I agree with all of Mr. DeMuth's proposals.
I don't claim that the 2% inflation target is achievable. I only claim that if you miss that target, you're less likely to end up with deflation than if the target is 0%.
In a later post Mr. Kling says the Fed actually has little/no control over inflation, in which case it doesn't make any difference what target it chooses. The discussion really is about the size of the federal deficit, which is a whole lot more complicated issue.
Let's just dissolve GOP. What's the point of having a party that can't even propose what it wants to do when it has power? My memory of the only achievement when Republicans were in power in 2016-18 was tax act. Does GOP even stand on that or is it time to put SALT deduction back in?
The statement by DeMuth: " initiatives to mobilize science and enterprise to dominate China in advanced computation, communication and weaponry and to repatriate production of national essentials such as pharmaceuticals" contains the implicit assumption that he knows enough to mobilize science and innovation to achieve his goals.
My observations are that once government money starts flowing into technological area the ability to innovate/$ goes down. A good example is NASA who has funded a new space ship just using an extension of the old model of non-reusable boosters or add-on boosters, while rejecting the reuse concept of Space X. Nobody had tried to do what Space X tried. Launch and land the booster for reuse, which could potentially cut the cost by a large multiple factor. In rejecting the obvious reuse concept they could maintain the high costs and tax payer funding and not take the risk of failure.
Once the government money flows getting more of that flow becomes the priority (rent seeking) rather than cutting costs to increase the bottom line.
The way my generation turns away and ignores the destroyed lives and deaths from opioids as we focus on other distractions is going to be seen as inexplicable and shameful by future generations.
On money - why is there so LITTLE inflation, if printing money/ increasing national debt is so bad? Previously, the result would be a weaker dollar vs other currencies, or vs. gold. But Warsh notes the even worse than US other currencies:
>>Year-to-date (as of September 13, 2022), the dollar is 12 percent stronger against the euro, 20 percent stronger against the Japanese yen, 15 percent stronger against the British pound sterling, and 8 percent stronger against the Chinese yuan.<<
If inflation is the market/ monetarist punishment for excess gov't spending, the lack of it means gov't spending is not yet in excess. From 2009 thru 2020, 2021. But in 2022, it WAS too much. And "too much" depends on all other stuff, including regulations that strangle US oil & gas production, and supply side messups, and even wars, especially in Europe.
Too much money chasing too few goods remains the two reasons for inflation, but both are complex.
On the problem of "the decay of higher education,", Congress needs to defund (end Fed loans, end Fed research, end tax-exempt status) to those colleges which have been discriminating against Republicans. 30% of their professors should have been Trump supporters, or at least both Romney & McCain supporters: 2 of the last 3 Pres. candidates.
The acceptance by Republicans of college discrimination against Reps is the main reason such discrimination has continued and grown into demonization and the social polarization. The idea that "the Right does it too" is total BS (almost, 99%?). How many of the top 100 endowment colleges discriminate against Dems? I think none, nada, 0. How many have 30% or more Reps, I guess also none.
College discrimination against hiring Reps is the biggest cultural problem in America. And the culture war will continue to get worse until that problem is solved.
I think there could be support for linking either minimum or full social security retirement age, or both, to income.
People who earn higher incomes tend to live longer. It might look more fair than increasing minimum or full retirement age based on birth year.
We also need to beat the notion that SS is anything other than a transfer from working people to retirees. It was tolerable when the ratio was 30/1. Now it’s less than 3/1. SS went negative in the early aughts.
Inflation is a disincentive to hold and and some other kinds or financial instruments and is a real cost. In setting an inflation target a central bank would weigh this against the benefits of making other relative prices more flexible and able to respond to economic shocks. If it does its estimates in good faith, there is nothing immoral about imposing this cost on cash holders.
DeMuth: Zero illegal immigration would be too costly to enforce, but it should be much lower. The calibration of legal immigration would entail a large increase. Freeing the energy sector should include freeing zero-CO2 emitting activities from obstacles in the context of a tax on net CO2 emissions.
A balanced structural, full employment budget is a better fiscal rule, but I would retain, indeed increases some income transfer programs which implies significant increases in taxation, away from business and toward personal incomes. Shift SS, ACA, Medicare, Medicaid, more generous unemployment insurance, child tax credit to a VAT.
Zero is a poor inflation target, 3% is probably better, it’s a technical matter, depending on the size and magnitudes of expected shocks and the flexibility of individual prices and wages to adjust downward to permit relative prices to adjust.
Total negative to his industrial policy initiatives, but agreement on incremental increase in school choice.
I think these would be good as either a Republican or Democratic party platform.
3% inflation is a 3% tax on savings held in cash. I don’t care what economists think about the economic effects. It’s immoral. But even putting that aside, it’s also bad policy because it encourages debt and discourages savings at the margin.
I agree that a savings tax due to inflation is a negative of 2 or 3% inflation but I've never understood why anyone would think 0% inflation is optimal. I fail to see how this rises to anything close to the most important consideration regarding an inflation target. The list of reasons for a low but not zero inflation target seems long and far more important to me.
I'm far from the most qualified to address that, and not so good at communicating what I know either. That said,
1 - By optimal I meant what is best for the economy. When the economy does poorly almost everyone loses more than what a low inflation takes away.
1a - If an economy running at 0% hits a slowdown it's harder to stimulate that economy than one with some inflation.
1b - 0% inflation is playing a really dangerous game. When inflation goes negative (it will happen for certain if the target is zero) people are hesitant to spend. It's not their only problem but look at Japan.
2 - This stealing you suggest applies to very little of all the money. Stock and bond prices are set by markets that account for predicted inflation. Bank rates are also market rates that account for predicted inflation, though they are a lot more sticky. You are really only looking at people holding paper and coin currency.
2a - With inflation averaging 1 to 2% over the last ~20 years, US banks mostly offered essentially 0% interest on basic accounts. What do you think they would offer if inflation went to 0%? Note that some European banks went below zero. Some large companies actually converted to paper currency and paid to store it. You think this is better?
3 - The calculated inflation rate isn't really the true rate. Some argue it is higher for various reasons but I'm of the camp that thinks the method used systematically underestimates the value of new products and tech improvements. I've heard that for this teason, inflation is overestimated by at least 1%. And also, everyone's situation is different depending on what they buy, savings, and loans.
Thanks for clarifying. I appreciate your detailed response and I think you communicated it well, contrary to the disclaimer you gave.
I think changes in the rate of inflation are what drive the dynamics you are describing, not absolute levels of inflation or deflation. I don’t see anything inherently wrong with 0% inflation, or even deflation, provided the central bank is explicitly targeting that inflation rate and real interest rates are managed appropriately.
People will adjust their expectations to a 0% inflation regime or even an intentionally deflationary regime just like they do with a 2% inflation regime, provided the central bank commits to a specific inflation rate and follows through with supporting it.
If the central bank did target 0% inflation, some months or quarters would have a slight amount of deflation, but other months would have a small amount of inflation. If they committed to the target, people’s expectations would adjust, and a -1% inflation quarter wouldn’t be alarming at all, just like a 1% inflation quarter isn’t alarming in a 2% inflation regime. People will only be hesitant to spend money if their expectation is that there will be additional deflation.
The difference between a 0% inflation regime and a 2% inflation regime is that the government isn’t underhandedly stealing the value stored in money and distorting the incentives for investment across the economy. I don’t see any reason why a 0% inflation target is unachievable or would have any of the negative consequences you describe.
1) there is a 0% chance of old age entitlements getting cut. I think this is self evident and won’t list the reasons
2) republicans should stop wasting political capital on #1
3) if #1 means bankruptcy, then the goal of the republican administration should be to determine who it’s friends are and who it’s enemies are and transfer as much money from enemies to friends before bankruptcy. Believe me, the other side is doing the same.
I mean friends in the broad sense (middle class normie families) and not the narrow sense (defense contractors or whatever)
4) when I say transfer I mean transfer. The least damaging form of government spending is writing people checks, the most damaging letting leftist beuracrats spend money. I would plow everything into a gigantic child subsidies, especially those that favor married middle class families with lots of kids. I would try to find students instead of systems in k-12
After all, those kids are the ones that have to dig out post bankruptcy
5) since 2000 it seems to me that “one off” spending of “crisises” vastly outstrips whatever changes to the run rate you could squeeze out of legislation. It matters who is in power when the next “crisis” comes
A good example of hurt enemies help friends is trump ending the salt deduction (helps wealthy blue state progressives and subsidized bloated state budgets) and using the money to increase the standard deduction (helps middle class families and is simple and doesn’t subsidies anything specific).
I would make each child add to the standard deduction in addition to the tax credits
Other ideas like this include:
1) Increasing the minimum distribution rate from foundation endowments 2) occupational licensing reform 3) mandatory return to office for government employees 4) relocating government employees away from state capitals and DC 5) raise the cap on the maximum income share that borrowers should pay in income based student loan repayment plans 6) reduce social security taxes for each kid you have.
Lift the income cap on Social Security taxes.
Each of these are more true than the GOPe-ish stuff Arnold linked to, especially the part of #3 to increase gov't benefits to those in the responsible middle class.
With HS. (how about $10k prize at age 18 or after for passing a GED or HiSET test).
Married. (A $1k first anniversary prize after first year; a $5k at 5 years; $10k at 10, 20, & 30 years)
With kids (like #4 BIG child subsidies, ~$10k?/yr, for each married bio-parent or only one if only legal guardian parent.)
>>"taking on entitlement spending is no more popular today" ... than for decades <<
Right.
And it won't ever become popular because society is getting richer AND life is unfair. So Reps, or Dems, who want to be elected need to give up massive reform, instead focusing on capping the top rates so as to be about the median IRS reported wage (~$62k last year). People at or above that median wage are not poor - tho many would be happy to vote for more benefits for themselves.
End tax-exempt status for colleges that have been discriminating against hiring Republicans (& pro-life folk).
Cap salaries of non-profit organizations to be some 1.5 or 2.0 x median income - so the most an NGO president could get would be $124k. Alternatively, put high and increasingly higher "surtax" taxes on payments made above the median level. They want "moral superiority", as well as lots of cash & status. Reps should be reducing the cash such do-gooders are getting.
Few bishops or priests or ministers are making more than that, personally - and I don't think they should.
Yep, at this point, a controlled demolition is better than what is being done.
Deregulation, austerity, and non-interventionism -- "Stop doing something!" -- are the keys, but insiders, stakeholders, and hawks are entrenched. All other reform ideas are at the 3rd decimal.
"There is a great deal of ruin in a nation." - Adam Smith
Republicans who want fiscal austerity should try to target spending growth that is lower that nominal GDP growth but higher than zero. Nominal growth in government spending that is a shrinking share of the economy achieves many (all?) the same goals: shrinking role of government, lowering debt service costs, protects borrowing capacity for emergencies, and probably reduces inflation. But spending growth below NGDP growth does so without the painful short term adjustment that could disrupt the economy and would make for a brutal political fight.
They did this in Canada and we could do it here too.
Biggest semi-realistic reform of Big Gov't Deep State problem:
10 year maximum service. Then out of government for as long as was served.
Fold Fed Retirement into Social Security, making leaving gov't service more retirement neutral.
Nothing will be done, and everyone of those people know it. The only way to true reform is through collapse of the present systems. The best outcome might be the systems collapsing one by one and being rebuilt smarter and more efficient, but it isn't what I expect to actually happen. We will run it all into the ground. My only real hope at this point is that it limps along beyond the horizon of my own life.
Leadership: Let’s simply start with a competent pragmatic president and leadership in Congress regardless of which team they come from. Then we can implement first principle programs (simply copy the playbook from Singapore).
This is the part of the outline of the plan that is labeled "A miracle occurs".
Keeping inflation at zero is impossible--one has to control both the supply of money and the demand. The latter is impossible to control. Some inflation is better than some deflation, so I can go along with a 2% target. 1% might be better. But in any case greater than zero.
Apart from that, I agree with all of Mr. DeMuth's proposals.
Why is a 2% inflation target achievable but a 0% target not?
I don't claim that the 2% inflation target is achievable. I only claim that if you miss that target, you're less likely to end up with deflation than if the target is 0%.
In a later post Mr. Kling says the Fed actually has little/no control over inflation, in which case it doesn't make any difference what target it chooses. The discussion really is about the size of the federal deficit, which is a whole lot more complicated issue.
Let's just dissolve GOP. What's the point of having a party that can't even propose what it wants to do when it has power? My memory of the only achievement when Republicans were in power in 2016-18 was tax act. Does GOP even stand on that or is it time to put SALT deduction back in?
The statement by DeMuth: " initiatives to mobilize science and enterprise to dominate China in advanced computation, communication and weaponry and to repatriate production of national essentials such as pharmaceuticals" contains the implicit assumption that he knows enough to mobilize science and innovation to achieve his goals.
My observations are that once government money starts flowing into technological area the ability to innovate/$ goes down. A good example is NASA who has funded a new space ship just using an extension of the old model of non-reusable boosters or add-on boosters, while rejecting the reuse concept of Space X. Nobody had tried to do what Space X tried. Launch and land the booster for reuse, which could potentially cut the cost by a large multiple factor. In rejecting the obvious reuse concept they could maintain the high costs and tax payer funding and not take the risk of failure.
Once the government money flows getting more of that flow becomes the priority (rent seeking) rather than cutting costs to increase the bottom line.
The way my generation turns away and ignores the destroyed lives and deaths from opioids as we focus on other distractions is going to be seen as inexplicable and shameful by future generations.
Yes, changes in inflation are more difficult than an undesired but static rate.
Yes, a -1% quarter doesn't seem bad in a mostly positive low inflation environment.
I don't know what else to say about why many economists I agree with think 0% is a poor choice for a target rate.
Given what I previously said, maybe you could further explain what you mean by stealing.
On money - why is there so LITTLE inflation, if printing money/ increasing national debt is so bad? Previously, the result would be a weaker dollar vs other currencies, or vs. gold. But Warsh notes the even worse than US other currencies:
>>Year-to-date (as of September 13, 2022), the dollar is 12 percent stronger against the euro, 20 percent stronger against the Japanese yen, 15 percent stronger against the British pound sterling, and 8 percent stronger against the Chinese yuan.<<
If inflation is the market/ monetarist punishment for excess gov't spending, the lack of it means gov't spending is not yet in excess. From 2009 thru 2020, 2021. But in 2022, it WAS too much. And "too much" depends on all other stuff, including regulations that strangle US oil & gas production, and supply side messups, and even wars, especially in Europe.
Too much money chasing too few goods remains the two reasons for inflation, but both are complex.
On the problem of "the decay of higher education,", Congress needs to defund (end Fed loans, end Fed research, end tax-exempt status) to those colleges which have been discriminating against Republicans. 30% of their professors should have been Trump supporters, or at least both Romney & McCain supporters: 2 of the last 3 Pres. candidates.
The acceptance by Republicans of college discrimination against Reps is the main reason such discrimination has continued and grown into demonization and the social polarization. The idea that "the Right does it too" is total BS (almost, 99%?). How many of the top 100 endowment colleges discriminate against Dems? I think none, nada, 0. How many have 30% or more Reps, I guess also none.
College discrimination against hiring Reps is the biggest cultural problem in America. And the culture war will continue to get worse until that problem is solved.
I think there could be support for linking either minimum or full social security retirement age, or both, to income.
People who earn higher incomes tend to live longer. It might look more fair than increasing minimum or full retirement age based on birth year.
We also need to beat the notion that SS is anything other than a transfer from working people to retirees. It was tolerable when the ratio was 30/1. Now it’s less than 3/1. SS went negative in the early aughts.
Inflation is a disincentive to hold and and some other kinds or financial instruments and is a real cost. In setting an inflation target a central bank would weigh this against the benefits of making other relative prices more flexible and able to respond to economic shocks. If it does its estimates in good faith, there is nothing immoral about imposing this cost on cash holders.
DeMuth: Zero illegal immigration would be too costly to enforce, but it should be much lower. The calibration of legal immigration would entail a large increase. Freeing the energy sector should include freeing zero-CO2 emitting activities from obstacles in the context of a tax on net CO2 emissions.
A balanced structural, full employment budget is a better fiscal rule, but I would retain, indeed increases some income transfer programs which implies significant increases in taxation, away from business and toward personal incomes. Shift SS, ACA, Medicare, Medicaid, more generous unemployment insurance, child tax credit to a VAT.
Zero is a poor inflation target, 3% is probably better, it’s a technical matter, depending on the size and magnitudes of expected shocks and the flexibility of individual prices and wages to adjust downward to permit relative prices to adjust.
Total negative to his industrial policy initiatives, but agreement on incremental increase in school choice.
I think these would be good as either a Republican or Democratic party platform.
3% inflation is a 3% tax on savings held in cash. I don’t care what economists think about the economic effects. It’s immoral. But even putting that aside, it’s also bad policy because it encourages debt and discourages savings at the margin.
I agree that a savings tax due to inflation is a negative of 2 or 3% inflation but I've never understood why anyone would think 0% inflation is optimal. I fail to see how this rises to anything close to the most important consideration regarding an inflation target. The list of reasons for a low but not zero inflation target seems long and far more important to me.
Optimal for who? It’s certainly not optimal for the people losing the value of their savings.
“The list of reasons for a low but not zero inflation target seems long and far more important to me.”
Can you help me understand what those reasons are and why they justify allowing the government to steal the value stored in money via inflation?
I'm far from the most qualified to address that, and not so good at communicating what I know either. That said,
1 - By optimal I meant what is best for the economy. When the economy does poorly almost everyone loses more than what a low inflation takes away.
1a - If an economy running at 0% hits a slowdown it's harder to stimulate that economy than one with some inflation.
1b - 0% inflation is playing a really dangerous game. When inflation goes negative (it will happen for certain if the target is zero) people are hesitant to spend. It's not their only problem but look at Japan.
2 - This stealing you suggest applies to very little of all the money. Stock and bond prices are set by markets that account for predicted inflation. Bank rates are also market rates that account for predicted inflation, though they are a lot more sticky. You are really only looking at people holding paper and coin currency.
2a - With inflation averaging 1 to 2% over the last ~20 years, US banks mostly offered essentially 0% interest on basic accounts. What do you think they would offer if inflation went to 0%? Note that some European banks went below zero. Some large companies actually converted to paper currency and paid to store it. You think this is better?
3 - The calculated inflation rate isn't really the true rate. Some argue it is higher for various reasons but I'm of the camp that thinks the method used systematically underestimates the value of new products and tech improvements. I've heard that for this teason, inflation is overestimated by at least 1%. And also, everyone's situation is different depending on what they buy, savings, and loans.
Thanks for clarifying. I appreciate your detailed response and I think you communicated it well, contrary to the disclaimer you gave.
I think changes in the rate of inflation are what drive the dynamics you are describing, not absolute levels of inflation or deflation. I don’t see anything inherently wrong with 0% inflation, or even deflation, provided the central bank is explicitly targeting that inflation rate and real interest rates are managed appropriately.
People will adjust their expectations to a 0% inflation regime or even an intentionally deflationary regime just like they do with a 2% inflation regime, provided the central bank commits to a specific inflation rate and follows through with supporting it.
If the central bank did target 0% inflation, some months or quarters would have a slight amount of deflation, but other months would have a small amount of inflation. If they committed to the target, people’s expectations would adjust, and a -1% inflation quarter wouldn’t be alarming at all, just like a 1% inflation quarter isn’t alarming in a 2% inflation regime. People will only be hesitant to spend money if their expectation is that there will be additional deflation.
The difference between a 0% inflation regime and a 2% inflation regime is that the government isn’t underhandedly stealing the value stored in money and distorting the incentives for investment across the economy. I don’t see any reason why a 0% inflation target is unachievable or would have any of the negative consequences you describe.