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Incentives Matter - Growth/Output Gap

 
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PostPosted: Fri Oct 31, 2014 2:08 pm    Post subject: Incentives Matter - Growth/Output Gap Reply with quote

http://www.washingtonpost.com/opinions/larry-summers-changing-the-tax-code-could-help-curb-inequality/2014/02/16/9e9c736e-9595-11e3-afce-3e7c922ef31e_story.html

Larry Summers:

"If total income were independent of efforts at redistribution, there would be a compelling case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom. Unfortunately, this is not the case. It is easy to conceive of policies that would have reduced the earning power of a Bill Gates or a Mark Zuckerberg by making it more difficult to start, grow and globalize businesses. But it is much harder to see how such policies would raise the incomes of the remaining 99.9 percent of the population, and such policies would surely hurt them as consumers."

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PeakTrader:

Employment-Population Ratio is still low:

http://data.bls.gov/timeseries/LNS12300000

Incentives matter.

For example, why build a business when it takes so much risk, work, responsibility, and dealing with career government bureaucrats?

It’s a lot easier to be lazy – work part-time, collect tax credits and other government benefits, take a couple of fun classes each semester, while receiving free money in grants & scholarships, etc..

****

Robert Hurley, you say: “…people would rather get benefits rather than work makes no sense.”

Here’s some reality:

Some people collect disability benefits and yet are capable of working. They do some work “under-the-table” (and don’t pay taxes).

Some people collect unemployment benefits, although they could get a job much sooner.

Some people refuse to work much overtime to avoid paying more taxes.

Some people go to college primarily for the money.

Etc.

If you pay people not to work, they won’t work.

We’ve seen an explosion in “entitlement” spending with a decline in economic growth.

If you want more, people have to produce more.

And, when it becomes harder to build a business, because of regulations and taxes, there are fewer jobs.

Waiting around for someone to provide you with a job may not produce a job.

Incentives matter.

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Baffling:

peak
“some people…”
you need to support your argument better than this. how much is “some people” and how many of the “good people” are you willing to throw under the bus to punish these “some people”. there will always be “some people” taking advantage of the system, unless they are a very large percentage of the people under consideration, “some people” should not be dictating the policy towards the rest of the people in need. its the throwing the baby out with the bathwater issue.

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PeakTrader:

Baffling, realistically, people tend to be rational.

You can’t blame them for that.

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Ricardo:

Robert Hurley,

Peak is essentially correct he simply used words that allowed you to demagogue a political talking point.

It is not that people are lazy, they are very resourceful. The people of the inner city know the government subsidies and requirements better than anyone with a real job. They are masterful at maximizing their return from government programs. The primary problem is that Progressives have structured these subsidies so that they do not show up as income. For example food stamps and medical benefits are not counted as income for those subsidized. So income figures do not really report income and studies of inequality are bogus.

But government subsidies are still a trap for the poor. For them to receive these subsidies (that actually thrust them into the top 10% of income in the world) they face restrictions on their actual reported income and even worse their assets. Most states will not qualify anyone for food stamps unless they have less than $5,000 in assets. This means that the poor have to be creative in divesting themselves of capital, the one thing that most economists agree creates wealth. So consider, when the number of those receiving food stamps under President Obama grow from 27 million to 50 million, there was a massive destruction of capital, just so the applicants could qualify.

As an example let’s say I save $10,000 so I do not qualify for food stamps. Now if I spend $5,000 of that on equipment to allow me to start a home business I still do not qualify for food stamps because my assets are to great, but if I spend $5,000 on a big screen TV I do qualify for about $8,000 per year in food stamps. By shifting from being productive to being a couch potato I have made $3,000 and even gained a big screen TV. These people are very intelligent – they are trapped in slavery to the state, but very intelligent. They CAN do the math.

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Steven Kopits:

My take on this: http://www.prienga.com/blog/2014/10/6/employment-to-population-ratios

Baffling, I’ve looked at all the comps in Europe, that is, all the major northern European countries. If your hypothesis were true, we’d expect to see gains similar to those seen in Germany also the Netherlands, Austria, Luxembourg, and Belgium (and frankly, France). And we don’t. Therefore, we can conclude that, while the Northern Tier European countries may have benefitted, on average, from a somewhat undervalued exchange rate, nevertheless, the gains occurred markedly only in Germany. This suggests that policy was key.

Note also that the US is by far the worst performer in the group, compared to pre-recession times. Disability payments policy and the explosion in student debt explain a lot of the variance.

Finally, note that Italy has 23 fewer working age people employed per every 100 than, for example, Switzerland. Everything you need to know about Italian public policy can be summarized in that one statistic.

The graph is here: http://www.prienga.com/blog/2014/10/31/employment-to-population-ratio-detail

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Hugo André:

Perhaps a more relevant statistic is the difference in wage growth between the various euro countries in the years before the crisis. As you can see from the chart in This http://mainlymacro.blogspot.se/2014/10/the-untold-story-of-eurozone-crisis.html , Germany has had far less wage growth than both northern and southern eurozone countries. This has helped German growth partly at the expense of German workers because the growth in wages has been lower than the productivity growth. The other part has been at the expense of the rest of eurozone countries since low wage-growth means less inflation, less inflation compared to other countries within a currency area leads to a devalued currency compared to the others. This happened in Germany but not in the Netherlands or France so I guess it’s more consistent with the data you cite.

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http://www.washingtonpost.com/blogs/wonkblog/wp/2014/05/05/u-s-businesses-are-being-destroyed-faster-than-theyre-being-created/

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PeakTrader:

I think, if President Obama was pragmatic, like President Clinton, and worked with everyone in Congress, in 2009, on a comprehensive package to cut taxes $5,000 per worker (or $700 billion for the 140 million workers at the time), reduce and remove $1 trillion of the $2 trillion a year in federal regulations (rather than adding more regulations), and gradually raising the minimum wage to $15 an hour, e.g. by 2015, we would’ve had much stronger growth.

And, when the economy actually recovered, tax rates could be raised and regulations could be reintroduced.

****

There has been some destruction of potential output, in part, because some people were willing to work longer, or harder, to pay-down debt, and build-up saving, but were unable to get a job, or a decent paying job.

Consequently, many people defaulted on their debts and/or retired on less income.

However, the continued massive idle and underemployed labor and capital are not frozen to where there is no output gap.

****

Joseph, the best time to raise taxes is when an expansion is well underway, e.g. after the Bush expansion began in 1991.

The U.S. economy did well with a Democrat President and a GOP Congress. There was give and take, or compromise.

Clinton working with the GOP did move to “reinvent government” (including welfare to workfare) and finally agreed to balance the budget.

Obama has been a rigid ideologue, unlike Clinton. Constantly demonizing and ridiculing the GOP is not leadership.

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