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How does inflation work anyway?

Posted by Economist Channel on Friday, October 20, 2017 Label: Commentary , Inflation , Monetary Policy

Monetary policy, central banking and inflation are hard. It's well to remember that. Today's blog post adds up a few things that seem like they're obvious but are not.

Inflation is hard.

Central bankers are puzzled at persistently low inflation. From WSJ,

Ms. Yellen said, as the “biggest surprise in the U.S. economy this year has been inflation.”

“My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year,” Ms. Yellen said, adding that “most of my colleagues on the [interest-rate-setting Federal Open Market Committee] agree.”

Of course, they've been expecting that for several years now. And she seems fully aware that they may be wrong once again:

She cautioned, however, that U.S. central bankers recognize recent low inflation could reflect something more persistent. “The fact that a number of other advanced economies are also experiencing persistently low inflation understandably adds to the sense among many analysts that something more structural may be going on,”

"Something more structural" is a pretty vague statement, for the head of an agency in charge of inflation, that has hundreds of economists looking at this question for years now! That's not criticism. Inflation is hard.

Why is it so hard? The standard story goes, as there is less "slack" in product or labor markets, there is pressure for prices and wages to go up. So it stands to perfect reason that with unemployment low and after years of tepid but steady growth, with quantitative measures of "slack" low, that inflation should rise, as Ms. Yellen's first quote opines.

That paragraph contains a classic economic fallacy, that of composition; the confusion of relative prices and the level of prices and wages overall. If labor markets get "tight," companies finding it hard to find workers, then yes, one expects wages to rise. But one expects wages to rise relative to prices. You only tempt workers to move to your company by offering them wages that allow them to buy more. Similarly, if there is strong demand for a company's products, its prices will rise. But those prices rise relative to other prices and to wages. Offering a company higher prices when its wages, costs, and competitor's prices are all rising does nothing to get it to produce more.

So, in fact, standard economics makes no prediction at all about the relationship between inflation -- the level of prices and wages overall; or (better) the value of money -- and the tightness or slackness of product and labor markets! The fabled Phillips curve started as a purely empirical observation, with no theory.

To get there, you need some mechanism to fool people -- for workers to see their wage rise, but not realize that other wages and prices are also rising; for companies to see their prices rise, but not realize that wages, costs, and competitors' prices are also rising. You need some mechanism to convert a rise in all prices and wages to a false perception that everyone's relative prices and wages are rising. There are lots of these mechanisms, and that's what economic theory of the Phillips curve is all about. The point today: it is not nearly as obvious as newspaper accounts point out. And if central bankers are a bit befuddled by the utter disappearance of the Phillips curve -- no discernible relationship, or actually now a relationship of the wrong sign, between inflation and unemployment, well, have a little mercy. Inflation is hard.

By the way, the oft-repeated mantra that "inflation expectations are anchored" offers no solace. In fact, it makes the puzzle worse. The standard Phillips curve says inflation = expected inflation - (constant) x unemployment. Variation in expected inflation is usually an excuse for a Phillips curve failure. Steady expected inflation means the Phillips cure should work better! (But beware that anchor. Is it anchored, or just not moving?)

Is policy tight or loose right now?

You'd think this were an easy question. The newspapers ring with "years of extraordinary stimulus" and "unusually low rates." And indeed, interest rates are low by historical standards, and relative to rules such as John Taylor's that summarize the successful parts of that history.

But ponder this. What does a central bank look like that is holding interest rates down? Well, it would be lending out a lot of money to banks, who would turn around and re-lend that money at higher interest rates. What does our central bank look like? Our central bank is taking in $2.2 trillion from banks, and is paying them a higher interest rate than they can get elsewhere. Right now, the Fed is paying banks 1.25% on their reserves. But Treasury bills are 1%. Even commercial paper is 1.13-1.2%. It looks every bit like a bank that is pushing rates up. And has been doing so for a long time.

How is this remotely possible? Well, historical interest rates reflected different circumstances. Interest rates around the world are lower than in the US. EU policy rates are about -0.5% and stuck there. Real interest rates are negative all over the world. If real interest rates are very low, and inflation is very low, nominal interest rates will be very low, no matter what they were historically.

For example, when interest rates hit 10% in the 1970s, higher than ever before seen, did that mean monetary policy was incredibly tight? No, as it turns out.

Supply vs. demand.

The central bank's main job, at least as monetary policy is currently construed, is to distinguish "supply" from "demand" movements in the real economy. If GDP falls because of "lack of demand," it is the Fed's job to stimulate by lowering interest rates, and then by other means such as QE and speeches. If GDP falls because of "lack of supply" however, the Fed should not respond, as that will just create stagflation.

It's really hard to tell supply from demand in real time. Here again, most commentary just assumes it's one or the other, and usually all demand -- a failing that is common throughout economic policy. Textbook models assume that central banks observe and respond to shocks, and know where those shocks come from. Not so in life.

Policy for growth?

This issue came up sharply in the last two days. The Wall Street Journal's "Fed for a growth economy" and George Shultz and John Cogan's "The Fed Chief America Needs" pose the question, how should monetary policy adapt if there is an era of supply-side growth, triggered by cuts in marginal tax rates and deregulation?

Pop quiz: How should monetary policy be different in a time of supply-side growth?

I bet you said "keep rates lower for longer." Maybe you're right. The growth is not a sign of future inflation, via the usual excess demand - more growth - more inflation channel. But didn't we (and the Journal) just say the Phillips curve is broken?

More importantly, an economy that grows faster should have higher real, and therefore nominal, interest rates. The first equations of macroeconomics are

real interest rate = (elasticity) x consumption growth rate

real interest rate = marginal product of capital

If we're growing faster, tomorrow is better than today, and interest rates need to be higher to convince people to save rather than spend today. If we're growing faster, it's because investment is more productive, and we need higher interest rates to attract capital to that investment.

So, higher growth should be accompanied by higher interest rates. Like everything else in economics, there is supply and demand. Higher rates can choke off demand. But higher rates can reflect good supply. The question is just how much higher! I did not say this would be easy.

You can tell in the WSJ commentary a feeling that Ms. Yellen and the standard way of thinking about monetary policy would get this wrong, and raise rates too much -- responding to growth, thinking that inflation is still just around the corner, on the belief that growth is always "demand" rather than supply. I'm not agreeing with this, just stating the implicit view.

How would the Taylor rule do here? Pretty well, actually. Taylor's rule specifies that the Fed should respond to the output gap -- the difference between the level of output and the full employment, or supply side limit -- not to the output growth rate. So if "potential GDP" rises from supply improvements, the gap increases, and Taylor's rule says to keep rates low. When the economy achieves the gap, return to normal. The rule might have to adjust to the new higher trend interest rate -- a higher r* in Fed parlance -- but it would not mistake growth.

That is, if the Fed correctly measured "potential" GDP and recognized that supply side improvements have increased potential. Standard calculations of potential GDP do not factor in marginal tax rates or deregulation, and look to me largely like two-sided moving averages. Again, distinguishing supply from demand, in real time, is hard.

A pure inflation or price level target might do even better, by getting the Fed out of the business of trying to diagnose supply vs. demand. But, advocates of a Taylor rule with a strong output component, or of the current Fed might say, by reacting to output (and relying on the Phillips curve) you can stabilize inflation better anyway, but nipping it in the bud. An the Fed has an explicit employment mandate that can't be ignored. I didn't say this was going to be easy.

How's this thing work anyway?

The wizard of OZ, charmingly, announced he didn't know how the thing works. Does the Fed? Just how are interest rates related to inflation? This is our last on the list of things that seem obvious but aren't obvious at all.

If you just plot inflation and interest rates, they seem to move together positively. Teasing out the notion that higher rates lower inflation from that graph takes a lot of work. My best guess, merging theory and empirical work, is that higher rates -- moved on their own, not in response to economic events -- temporarily lower inflation, but then if you stick with higher rates, inflation eventually rises. And vice versa, which accounts for very low inflation after interest rates have been stuck low for a long time. Maybe yes, maybe no, but even this much is not certain.

Tyler: Equity financed banking is possible!

Posted by Economist Channel on Thursday, October 19, 2017 Label: Banking , Commentary , Financial Reform , Regulation

Tyler Cowen wrote an extended blog post on bank leverage, regulation and economic growth on Marginal Revolution. Tyler thinks the "liquidity transformation" of banks is essential, and that we will not be able to avoid a highly levered banking system, despite the regulatory bloat this requires, and the occasional financial crisis. As blog readers may know, I disagree.

A few choice quotes from Tyler, though I encourage you to read his entire argument:

I think of the liquidity transformation of banks in terms of...Transforming otherwise somewhat illiquid activities into liquid deposits. That boosts risk-taking capacities, boosts aggregate investment, and makes depositors more liquid in real terms.

Requiring significantly less bank leverage, at any status quo margin, probably will bring a recession.

...many economies are stuck with the levels of leverage they have, for better or worse.

I fear ... that we will have to rely on the LOLR function more and more often.

I don’t find the idea of 40% capital requirements, combined with an absolute minimum of regulation, absurd on the face of it. But I don’t see how we can get there, even for the future generations.

Depressing words for a libertarian, usually optimistic about markets.

This is a good context to briefly summarize why "narrow", or (my preferred) equity-financed banking is in fact reasonable, and could happen relatively quickly.

Tyler's main concern is that people need a lot of "liquidity" -- think money-like bank accounts -- and that unless banks can issue a lot of deposits, backed by mortgages and similar assets, bad things will happen -- people won't have the "liquidity" they need, and businesses can't get the investment they need.

Here are a few capsule counter arguments. In particular, they are reasons why the economy of, say 1935 or even 1965 might have required highly levered banks, but we do not.

1) We're awash in government debt.

We've got about $20 trillion of government debt. That could back about $20 trillion of risk free assets. (It would be better still if the Treasury would issue fixed-value floating-rate debt, needing no intermediation at all.) Add agency debt -- backed by mortgage backed securities that are already guaranteed by the Treasury -- and you have another $8 trillion. Checking accounts are about $1.5 trillion and total bank liabilities about $9 trillion.

In the past, we may have needed to create money-like deposits by backing them with bank assets. A happy side to our debt expansion is that government debt -- the present value of the governments' taxing authority -- provides ample assets to back all the money-like deposits you want.

2) Liquidity no longer requires run-prone assets. Floating value assets are now perfectly liquid

In the past, the only way that a security could be "liquid" is if it promised a fixed payment. You couldn't walk in to a drugstore in 1935, or 1965, and trade an S&P500 index share for a candy bar. Now you can. (And as soon as it is cleared by blockchain, it will be even faster and cheaper than credit cards.) There is no reason your debit card cannot be linked to an asset whose value floats over time.

This is the key distinction. The problem with short term debt is that it is prone to runs. Financial crises are runs, period. Short term debt is prone to runs because it promises a fixed amount ($1), any time, first come first serve, and if the institution does not honor the claim it is bankrupt.

Seriously. Imagine that your debit card was linked to an ETF that held long-only, full allocations (not risky tranches) of high grade mortgage backed securities. Its value would float, but not a lot. Bank assets are, curiously immensely safe. So it might go up or down 2% a year. In return you get a higher interest rate than on pure short-term government debt (of which there is $28 trillion under my scheme). You would hardly notice. Yet the financial system is now immune from runs!

3) Leverage of the banking system need not be leverage in the banking system.

Suppose even this isn't enough and we still need more risk free assets. OK, let's lever up bank assets. But why should that leverage be in the bank. Let the banks issue 100% equity. Then, let most of that equity be held by a mutual fund, ETF, or bank holding company, and let those issue deposits, long term debt, and a small amount of additional equity. Now I have "transformed" risky assets into riskfree debt via leverage. But the leverage is outside the bank. If the bank loses money, the mutual fund, ETF, or holding company fails... in about 5 minutes. The creditors get traded equity of the bank, which is still at 90% of its initial value. There is no reason bank creditors should dismember a bank, go after complex and illiquid bank assets, stop operation of the bank. If bank assets must be leveraged, put that leverage outside the bank.

And, if you need even more leverage, well, these leveraged ETF can hold other assets too. There is no reason not to leverage up stock, corporate bonds, REITS, mortgage backed securities or other assets if we desperately need to provide a riskfree tranche. We don't see this. Why not? Maybe "riskfree" assets aren't so important after all!

Tyler sort of acknowledges this, but with fear rather than excitement:

But what if a demand deposit is no longer so well-defined? What about money market funds? Repurchase agreements? Derivatives and other synthetic positions? Guaranteeing demand deposits is a weaker and weaker protection for the aggregate, as indeed we learned in 2008. The Ricardo Hausmann position is to extend the governmental guarantees to as many areas as possible, but that makes me deeply nervous. Not only is this fiscally dangerous, I also think it would lead to stifling regulation being applied too broadly.

A lot of commercial bank leverage can be replaced by leverage from other sources, many less regulated or less “establishment.” Overall, on current and recent margins I prefer to keep leverage in the commercial banking sector, compared to the relevant alternatives....One big problem with attempts to radically restrict bank leverage is that they simply shift leverage into other parts of the economy, possibly in more dangerous forms...

Absolutely. In my view nobody should issue large quantities of run-prone assets -- fixed value, immediate demandability, first come first serve -- unless backed by government debt. However, we should cherish the rise of fintech that allows us to have liquidity without run-prone assets. And don't fear even leverage outside commercial banks without thinking about it. My ETF, whose assets are common stock, and liabilities are say 40% "deposits", 40% long-term debt, and 20% equity, really could be recapitalized in 5 minutes, without any of the adverse consequences of dragging a bank through bankruptcy court.

4) Inadequate funds for investment I'm not quite sure where Tyler gets the view that without lots of unbacked deposits, funds for investment will be scarce -- just how leverage

boosts risk-taking capacities, boosts aggregate investment,...

Requiring significantly less bank leverage, at any status quo margin, probably will bring a recession.

The equity of 100% equity financed banks would be incredibly safe. 1/10 the volatility of current banks. It would be an attractive asset. The private sector really does not have to hold any more risk or provide any more money to an equity financed banking system. We just slice the pizza differently. If issuing equity is hard, banks can just retain profits for a decade or so.

Or, better, our regulators could leave the banks alone and allow on on-ramp. Start a new "bank" with 50% or more equity? Sure, you're exempt from all regulation.

And, in case you forgot, we live in the era of minuscule interest rates -- negative in parts of the world; and sky high equity valuations. All the macroeconomic prognosticators are still bemoaning a "savings glut." A scarcity of investment capital, needing some sort of fine pizza slicing to make sure just the right person gets the mushroom and the right person gets the pepperoni does not seem the key to growth right now.

Update: Anonymous below asks a good question: "What about payrolls, debiting and crediting exports and foreign transactions, escrows." And I could add, accounts receivable, trade credit and so forth.

Answer: We need to eliminate large-scale financing by run-prone securities. Not all debt is run prone. It needs to be very short term, demandable, failure to pay instantly leads to bankruptcy, and first come first serve. And it has to be enough of the institution's overall financing that a run can cause failure. An IOU for a bar bill -- pay for my beer, I'll catch up with you next week -- is a fixed-value security, yes. But it is not run prone. You can't demand payment instantly, bankrupt me if I don't pay, I have the right to postpone payment, it's not first come first serve, and such debts are a tiny fraction of my net worth.

Update: A correspondent writes

[Equity financed banking] Already exists! Albeit not at scale yet. It’s called asset management. See, for example, Alcentra, a UK-based company that lends directly to mid-sized European companies. They are largely “equity financed,” meaning that they sell shares in their funds, mostly to institutional investors. They also offer separate accounts, which you can also think of as “equity financing.” They are not a bank, but an asset manager, taking advantage of reduced lending since the crisis by banks to mid-sized and low credit firms in Europe. They have about 30 billion in AUM. This is a “disintermediation” story no one is talking about, and direct lending by asset managers is on the rise more broadly as well.

2017 PhD Conference in Behavioural Science in Dublin

Posted by Economist Channel on Friday, October 13, 2017 Label:

2017 PhD Conference in Behavioural Science

Thursday, the 30th of November 2017

UCD Geary Institute for Public Policy, Dublin

The UCD Geary Institute for Public Policy is pleased to announce our PhD Student Conference in Behavioural Science for 2017 in collaboration with the Stirling University Management School. This continues two successful annual events held at Stirling. For information about last year's PhD conference click here. The PhD conference will be held at University College Dublin on November 30th and will be followed by the 10th annual Irish economics and psychology conference on December 1st. Attendees to the PhD conference on November 30th are also welcome to attend the December 1 workshop. Please sign up separately for the workshop. Our keynote speakers will be Professor Don Ross (UCC) and Professor Jennifer Sheehy Skeffington (LSE).

Day Schedule (Thursday, November 30, 2017)

09:00-09:15: Registration

09:15-10:00: Welcome & Introductory Talk by Prof Liam Delaney

10:00-10:30: Coffee Break

10:30-11:30: Session 1

Session 1a: The environment

1. Victoria Taranu (Hasselt University) on "Experimental study on alternative information framings of the flemish energy performance certificate" (with Griet Verbeeck).

2. Vlada Pleshcheva (Humboldt University Berlin) on "Do consumers value qualitatively identical improvements in fuel consumption and CO2 emissions of cars equally?"

Session 1b: Media use

3. Veelaiporn Promwichit (University of Edinburgh) on "Can social media sentiment predict futures returns?" (with Arman Eshraghi and Ronan Gallagher).

4. Kevin Momanyi (University of Aberdeen) on "An econometric analysis of the impact of telecare" (with Paul McNamee and Diane Skatun).

11:30-12:00: Coffee Break

12:00-13:00: Session 2

Session 2a: Locus of control

5. Juliane Hennecke (Free University Berlin) on "Controlled by politics? - Economic situation, locus of control and political participation".

6. Malte Preuss (Free University Berlin) on "Biased by success and failure: How unemployment shapes stated locus of control" (with Juliane Hennecke).

Session 2b: Decision Making 1

7. Luis Enrique Loria (University of Aberdeen) on "Current experience matters: Evidence from a reference dependent Discrete Choice Experiment design" (with Verity Watson, Takahiko Kiso, and Euan Phimister).

8. Mishal Ahmed (Georgia Institute of Technology) on "Quality provision with salient thinkers".

13:00-14:00: Lunch Break

14:00-15:30: Session 3

Session 3a: Mental Health and Work

9. Klavs Ciprikis (Dublin Institute of Technology) on "The impact of mental disorders on wages in the United Kingdom: An empirical analysis".

10. Kate Isherwood (Bangor University) on “Looking forwards to work: Motivational and cognitive interventions to promote wellbeing, productivity and economic activity in the workforce.” (with John Parkinson, Gareth Harvey, and Andrew Goodman).

Session 3b: Decision Making 2

11. Féidhlim McGowan (ESRI) on "Representation or reproduction? Lay understanding of probability distributions and willingness to take bets" (with Pete Lunn).

12. Terry McElvaney (ESRI) on “Complexity in car finance: Assessing limitations in consumer comprehension of personal contract plans (with Pete Lunn and Féidhlim McGowan).

15:30-16:00: Coffee Break

16:00-17:00: Session 4

Session 4a: Education

13. Emmanuel Igwe (Greenwich University) on “A study on attitudes into postgraduate education” (with Gabriella Cagliesi and Denise Hawkes).

14. Kenneth Devine (Central Bank of Ireland) on "Risky Business: New Insights into Mortgage Choice and Risk Preferences".

Session 4b: Subjective Well-Being

15. Caroline Wehner (Maastricht University and IZA) on "Personality and educational achievement: The role of emotional stability and conscientiousness" (with Trudie Schils).

16. Rhi Willmot (Bangor University) on “The Role of Positive Psychology in Physical Wellbeing” (with John Parkinson).

For questions, please contact Liam Delaney (liam.delaney@ucd.ie) or Leonhard Lades (leonhard.lades@ucd.ie)

Till Grüne-Yanoff public talk on behavioural economics and policy

Posted by Economist Channel on Wednesday, October 11, 2017 Label:

Professor Till Grüne-Yanoff will deliver a public lecture to the Irish Behavioural Science and Policy Network on Wednesday 18th October at 6pm. There will be a wide-ranging Q+A session following the talk which will conclude at 7.30pm. The venue is the Royal Irish Academy. He will speak on behavioural economics and public policy, in particular on the role of policy in "boosting" ability to make good decisions under a variety of circumstances. The webpage to register for the event is available here.

Nudging and Boosting: Steering or Empowering Good Decisions

Ralph Hertwig and Till Grüne-Yanoff

Max Planck Institute for Human Development, Berlin and Royal Institute of Technology, Stockholm

Abstract
In recent years, policy makers worldwide have begun to acknowledge the potential value of insights from psychology and behavioral economics into how people make decisions. These insights can inform the design of nonregulatory and nonmonetary policy interventions—as well as more traditional fiscal and coercive measures. To date, much of the discussion of behaviorally informed approaches has emphasized “nudges,” that is, interventions designed to steer people in a particular direction while preserving their freedom of choice. Yet behavioral science also provides support for a distinct kind of nonfiscal and noncoercive intervention, namely, “boosts.” The objective of boosts is to foster people’s competence to make their own choices—that is, to exercise their own agency. Building on this distinction, we further elaborate on how boosts are conceptually distinct from nudges: The two kinds of interventions differ with respect to (a) their immediate intervention targets, (b) their roots in different research programs, (c) the causal pathways through which they affect behavior, (d) their assumptions about human cognitive architecture, (e) the reversibility of their effects, (f) their programmatic ambitions, and (g) their normative implications. We discuss each of these dimensions, provide an initial taxonomy of boosts, and address some possible misconceptions.

Biography:

Till Grüne-Yanoff is professor of philosophy at the Royal Institute of Technology (KTH) in Stockholm.

His research focuses on the philosophy of science and on decision theory. In particular, he investigates the practice of modelling in science and engineering, develops formal models of preference consistency and preference change and discusses the evaluation of evidence in policy decision making. Click here for his Google Scholar page.

Till is editor of the journal Economics & Philosophy. He is also a member of the TINT Finnish Centre of Excellence in the Philosophy of Social Science in Helsinki, and a regular guest researcher at the Max Planck Institute of Human Development.

He lives with his wife and his two children in the beautiful Vasastan neighborhood of Stockholm.

New Research Group Members

Posted by Economist Channel on Saturday, October 7, 2017 Label:

Delighted to welcome four new members of the research team. We will shortly advertise some more posts.

Welcome to Till Weber who joins us, having just submitted his PhD at Nottingham. Till will work with us for at least the next two years, including lecturing on the new MSc. His webpage is below and he will present an overview of his experimental research at a later session. https://www.nottingham.ac.uk/economics/people/till.weber

Welcome also to Leonhard Lades who joins EnvEcon and Geary for two years from the University of Stirling. Leo will also give some lectures on the MSc. He has published a number of papers on intertemporal choice, consumption, ethical aspects of nudging, and a variety of other topics. https://scholar.google.com/citations?user=3SQTAFQAAAAJ&hl=en

While he has been here a while on another project, I am also glad to formally welcome Michael Daly, also from Stirling, who starts his 2 year Marie Skłodowska Curie fellowship here in the next couple of weeks. Michael is Associate Professor at Stirling and has published extensively in economic psychology, health psychology, behavioural change and cognate areas. https://www.michaeldalyresearch.com/

Tadgh Hegarty has also started with us, and will conduct a PhD at the intersection of behavioural economics and machine learning, examining the nature and extent of behavioural biases in gambling decisions.

Cowen on Fed Chair

Posted by Economist Channel on Thursday, October 5, 2017 Label: Commentary , Financial Reform , Monetary Policy

Tyler Cowen has a good thought on the Fed chair question. The next chair has to be a good politician, in all the positive senses of that word, more than a good technocrat:

The Fed has functioned as a technocracy for a long time, but might the future bring a Fed that is irrevocably split between competing factions? ...the future could bring a Fed divided over how much it should assert its political independence, how much it should assume responsibility for possible asset bubbles, how it should respond to an international financial crisis, or how much it should align with an “America First” mindset. ....

The backdrop is this: Ben Bernanke’s Fed, with its bailouts during the financial crisis, ate up a lot of the Fed’s political capital, though arguably for the worthwhile cause of saving the financial system. As a result, the Fed no longer has its pre-crisis credibility. As long as the American economy is on the path of a slow and steady recovery, with relatively high asset prices, that’s bearable.

But the next time major economic volatility comes around, Fed decisions will be scrutinized and politicized like never before. This will happen in the mainstream media, on social media, and perhaps by our very own president in his tweets or offhand remarks. The key factor for any Fed leader will be the ability to maintain and project a coherent, unified voice at the Fed, so that the Fed remains an island of relative sanity in the polarized nation. This will be a problem of crisis management, but unlike Bernanke’s crisis management it will be fought first and foremost in the trenches of public opinion.

(The open vice chair positions are good ones for technocrats, who need to be able to translate the abstruse language of the staff.)

My related thought: We focus a lot on interest rate policy, but most of what the Fed does these days is financial regulation and supervision, and those decisions are likely much more important going forward. The challenging question there is "macro-prudential." Is it the Fed's job to worry about "asset bubbles," and to micromanage "credit booms" and their eventual busts? Or is it better for the Fed to limit its authority, to preserve independence, credibility, and insulation from political demands for action and political criticism of its actions, by pronouncing there are economic events beyond its scope?

Moreover, if the Fed is to limit the scope of its financial dirigisme, it had better do so beforehand not afterwards. If everyone expects the Fed to set prices and bail out hither and yon, and then the Fed gets religion (perhaps under relentless political pressure), the crisis will be so much worse. Bernanke also benefitted from acting far beyond expectations of what he would or could do. The next chair will be in the opposite situation, have to set limits of crisis reaction, and disappoint expectations. It's much better to do that ahead of time -- and much harder for an institution like the Fed to scale back people's expectations, and to renounce and pre-commit against attractive-sounding powers.

Update:

Narayana Kocherlakota predicts Jerome Powell. In line with some of the above thoughts, Narayana's view basically is that monetary policy is doing fine. Low unemployment, low inflation, low interest rates, low macro and financial volatility. Mission accomplished. Moreover, if there is a hawk vs. dove question, President Trump looks likely to be on the dove side of it. (Sadly, I doubt that rules and precommitment vs. discretion is ringing in the appointment decision.) However, supervision and regulation is the key issue going forward, and Narayana views Powell as Yellen monetary policy plus a regulatory/supervisory reform.

(I learned to use both words from Ms. Yellen's Jackson hole speech. Regulation is rules, supervision is sending Fed people to look over banks' shoulders. It's a good distinction.)

Atlas on Health

Posted by Economist Channel on Wednesday, October 4, 2017 Label: Commentary , Health economics , Regulation

My colleague Scott Atlas has a superb oped in today's (October 4) Wall Street Journal. Instead of just arguing about health insurance and how we, via the government, will subsidize and pay for health care demand, let's fix the equally catastrophically broken health supply system.

"Republicans have now failed twice to repeal and replace ObamaCare. But their whole focus has been wrong. The debate centered, like ObamaCare, on the number of people with health insurance. A more direct path to broadening access would be to reduce the cost of care. This means creating market conditions long proven to bring down prices while improving quality—empowering consumers to seek value, increasing the supply of care, and stimulating competition."

This is the kind of out of the box, out of the usual left-right mudslinging idea that might someday spark a bipartisan reform, if our legislators could someday get past scoring symbolic points and sit down to actually fix something. (I have written similar ideas, but nowhere near as clearly, or as based in lots of fact-based scholarship and detail as Scott has.)

Scott starts with the sensible idea that we need to expand people spending their own money, via high deductible catastrophic plans, and vastly expanded HSAs. True, and well documented, but just spending your own money doesn't really help as long as supply is so constrained. In the joke version, it's like spending your own money to find a cab to LaGuardia in the rain at 5:00 PM on friday pre-Uber. Supply is constrained, and competition is stifled, so the government can enforce cross subsidies, and just paying out of pocket is not really going to help until supply competition is unleashed.

Scott gets there quickly. To the view that we need more regulations forcing hospitals to post prices -- sort of like the funny prices you see posted in hotel rooms on occasion, and likely just as effective -- Scott answers the fact, obvious to us, but new to Washington,

The most compelling motivation for doctors and hospitals to post rates would be knowing that they are competing for price-conscious patients empowered with control of their own money.

Accent on the competing. If they don't someone else can and will. Specifically,

... work strategically to increase the supply of medical services to stimulate competition. In large part, this means deregulation. Lawmakers should remove outmoded scope-of-practice limits on qualified nurse practitioners and physician assistants. ...

Medical credentialing should be simplified, and the licensing boards should institute reciprocal (national) licensing for doctors to help telemedicine proliferate across state lines. Medical school graduation numbers have stagnated for almost 40 years.

I might add, H1B visa for any qualified doctor or nurse who wants to immigrate. Holding back immigrant supply to keep up American wages sounds nice, until you realize who is paying those wages -- all of us.

Archaic barriers to medical technology also impede competition and raise prices. ...certificate-of-need requirements, which require health-care providers to get permission from the state to add medical technology like MRI scanners,...are still in place in 34 states, Puerto Rico and the District of Columbia.

introduce the right incentives into the tax code. Today employees aren’t taxed on the value of their health benefits—and there is no limit to that exclusion.
Similarly, ObamaCare’s premium subsidies and the tax credits proposed by Republicans artificially prop up high insurance premiums for bloated coverage that minimizes out-of-pocket payments.

As the last paragraph emphasizes, this is bipartisan. The same Democrats who realize that occupational licensing and zoning density restrictions are really hurting real estate and labor markets, adding to inequality, can realize the same thing of all our restrictions on the supply of health care.

Scott's book is an excellent longer treatment of these themes, well documented with many more ideas. And best of all, it's available for free from Hoover, though you really should go out and buy one.

VAT -- full text

Posted by Economist Channel on Label: Commentary , Taxes

Now that 30 days have passed, the full text of the WSJ oped advocating a VAT instead of all other federal taxes. Previous post with extra comments.

By John H. Cochrane
Sept. 4, 2017 2:38 p.m. ET

Soon the Trump administration and congressional leaders will unveil their tax-reform proposal. Reports indicate the proposal will include some reductions in corporate and personal rates and the end of some tax deductions. But true reform is likely to be stymied by the usual interests, by those who see the tax code primarily as a way to transfer income to or from favored or disfavored groups, and by politicians who dole out deductions, exemptions and subsidies to supporters.

So if the process stays its normal course, don’t expect the complex and dysfunctional U.S. tax code to change much. But if our leaders were to attempt a really fundamental reform, they could break the political logjam. Changes must be simple, understandable and attractive to voters. And only fundamental reform paired with deregulation can hope to raise economic growth to 3% or more.

The best way to do this is to eliminate entirely the personal and corporate income tax, estate tax and all other federal taxes, and to implement instead a national value-added tax—essentially a national sales tax.

Much of the current tax mess results from taxing income. Once the government taxes income, it must tax corporate income or people would incorporate to avoid paying taxes. Yet the right corporate tax rate is zero. Every cent of corporate tax comes from people via higher prices, lower wages, or lower payments to shareholders. And a corporate tax produces an army of lawyers and lobbyists demanding exemptions.

An income tax also leads to taxes on capital income. Capital income taxes discourage saving and investment. But the government is forced to tax capital income because otherwise people can hide wages by getting paid in stock options or “carried interest.”

The estate tax can take close to half a marginal dollar of wealth. This creates a strong incentive to blow the family money on a round-the-world cruise, to spend lavishly on lawyers, or to invest inefficiently to avoid the tax.

Today’s tax code tries to limit this damage with a welter of complex shelters: 401(k), 526(b), IRA, HSA, deductions for corporate investment, and complex real-estate and estate-tax shelters. Taxing something and then offering complex shelters is a sure sign of pathology. But by taxing cars, houses and boats when people or companies buy them, all this complexity can be thrown out. With a VAT, money coming from every source—wages, dividends, capital gains, inheritances, stock options and carried interest—is taxed when it’s spent.

A reformed tax code should involve no deductions—including the holy trinity of mortgage interest, employer-provided health insurance, and charitable deductions. The interest groups for each of these deductions are strong. But if the government doesn’t tax income in the first place, these deductions vanish without a fight.

In these and other ways, if Congress and the president drop the income tax in favor of a VAT, or another simple consumption tax, they can break the political logjam and achieve a dramatic pro-growth reform.

It is essential that the VAT be uniform, and it is best to carve that in stone at the outset. Trying to transfer income or subsidize people and businesses by charging different rates for different goods or organizations will again muck up the tax system. And it is essential that the VAT replace rather than add to the current tax system, as it does in Europe.

What about progressivity? It is easy to make a value-added tax progressive: In place of current exemptions, send everyone a $10,000 check. Or people could receive a refund according to how much they spend, similar to income-tax refunds. Taxpayers could get a full refund for the first $10,000, half for the next $10,000, and so forth. Electronic record-keeping makes this straightforward—it’s just a big debit or credit card reward—and everyone would have an incentive to report purchases rather than to hide income.

But the chaos in U.S. income redistribution is as great as the anarchy in the tax code. Tax discussions fall apart because the redistributive influence of each change is assessed in isolation. By measuring how the tax and transfer system work together, politicians could get better taxes and more effective redistribution.

The U.S. also needs an integrated social-insurance program: Send checks to needy people, yes, but also monitor the amount they get from all government sources, including college financial aid, health insurance, energy assistance, Medicare, Medicaid, Social Security, unemployment insurance, food stamps, farm programs, housing and so on. Even without reforming the programs, it is necessary at least to measure their total effect to calibrate accurately any tax-based redistribution.

What about the tax rate? Well, if the federal government is going to spend 20% of gross domestic product, the VAT will sooner or later have to be about 20%. Tax reform is stymied because politicians mix arguments over the rates with arguments over the structure of taxes. This is a mistake. They should first agree to fix the structure of the tax code, and later argue about rates—and the spending those rates must support.

Is all of this unrealistic? No. Sometimes when little steps are impossible, big jumps are feasible. It is unrealistic to think that tweaks to the current system will produce a big change from the status quo.

Now is the time. If American democracy cannot fix this tax code, economic stagnation and debt crisis or massive spending cuts await.

Mr. Cochrane is a senior fellow at Stanford University’s Hoover Institution and an adjunct scholar at the Cato Institute.

Update: I learned of a precedent for the progressive VAT idea, Yaacobi Nir, "Progressive V.A.T. as a Substitute for Income Tax" December 2008

Government of Ireland Postgraduate Scholarship 2018

Posted by Economist Channel on Tuesday, October 3, 2017 Label:

The deadline for these scholarships is November 1st. We are certainly open to speaking to MSc students interested in applying for PhD funding to conduct research in our research group. Full details are available here They are open to EU nationals living outside of Ireland and other resident categories set out in their terms and conditions to apply to take their PhD in an Irish university.

Glenn W. Harrison Friday 13th October 1230pm to 2pm

Posted by Economist Channel on Monday, October 2, 2017 Label:

Professor Glenn Harrison comes to Dublin on October 13th and will give a public lecture on Behavioral Welfare Economics. Professor Harrison is one of the leading researchers in econometrics and experimental economics. I can also say from experience that he is an engaging speaker with a wide range of intellectual interests. He has agreed to give a talk that will be accessible to a broad audience interested in behavioural economics. His bio is below and website is here. The talk will take place from 1230pm to 2pm at the Institute of Banking Building near the IFSC. There is no charge for registering but we ask people to register in advance on this link as space is limited and the building is secured.

Glenn Harrison is the C.V. Starr Chair of Risk Management & Insurance and director of the Center for the Economic Analysis of Risk (CEAR) in the Department of Risk Management & Insurance, J. Mack Robinson College of Business, Georgia State University. He has more than 185 academic publications, including general journals such as Econometrica, American Economic Review, Journal of Political Economy, Economic Journal, Journal of the American Statistical Association, and American Journal of Public Health, and specialist journals such as Journal of Environmental Economics & Management, Land Economics, Natural Resources Journal, Journal of Law & Economics, Experimental Economics, and Economics & Philosophy. His research interests include experimental economics, law and economics, international trade policy and environmental policy.

His work in experimental economics has included the study of bidding behavior in auctions, market contestability and regulation, bargaining behavior, and the elicitation of risk and time preferences. Most recently it has examined the complementarity of laboratory and field experiments. His work in law and economics has centered on the calculation of compensatory damages in tobacco litigation, including testifying for plaintiffs in the Medicaid litigation that resulted in a settlement worth more than $200 billion. Most recently he has worked on the relationship between compensatory and punitive damages, and class actions involving the excessive promotion of certain drugs. His work in international trade policy has employed computable general equilibrium models to quantify the effects of unilateral, regional and multilateral trade reforms. A particular focus of this policy analysis has been to assess the effects of trade reform on poor households in developing countries. His work in environ mental economics has included modeling the effects of alternative policies to mitigate global warming, critiques of casual applications of the contingent valuation method, and improved methods of damage assessment. Most recently he has focused on the formal characterization of environmental reform as a “policy lottery” that properly reflects uncertainty in predicted effects on households.

Professor Harrison has been a consultant for numerous government agencies and private bodies. These include the World Bank (evaluating trade policy reforms for developing countries), the Swedish government and the United States Environmental Protection Agency (evaluating carbon tax proposals), the Danish government (evaluating tax and deregulation policies), and counsel representing parties suing tobacco companies and drug companies for economic damages. Professor Harrison is a Pisces, and loves red wine, one Swedish woman, and one American daughter. Before academic life, Professor Harrison played Australian “no-rules” football for Hawthorn in the Australian Football League, kicking one goal in his career.

Irish Postgraduate and Early Career Conference 2018

Posted by Economist Channel on Label:

From 2001 to 2013, we held eleven workshops in Ireland for postgraduate and early career researchers. They started as exclusively aimed at Irish-based researchers and eventually morphed into international events. The events were run mostly by PhD students in the Universities, including events hosted by UCD, TCD, Limerick, Cork, and Galway. In Scotland, 8 universities combine on PhD training and host an annual event for PhD students. Such events provide students and researchers an opportunity to discuss their work outside their own institution and meet other researchers and faculty.

To restart this effort, we will host a full-day event in Dublin on January 19th. The event is aimed at PhD students and early career researchers across the Irish universities. A full call for papers with details of submissions will be released soon. The event will take the form of thematic sessions with ideally at least some faculty discussant input at each session, along with keynote talks, and engagement with policy and industry. We welcome submissions from PhD students and early career researchers in institutions on the island of Ireland.

I would welcome suggestions from students, researchers, and faculty about how to make this a feature of the Irish research environment. Some questions include whether it should be a student-run event in future years, links to the Irish Economics Association, venues, format of sessions, whether it should be restricted to national institutions, whether there should be job-market aspects etc., I hope revamping these sessions will also create an opportunity to discuss collaboration on advanced training in Economics across the country.

Workplace Well-Being Programmes

Posted by Economist Channel on Sunday, October 1, 2017 Label:

Below is the submitted text of an article I wrote for the Sunday Business Post - link to the final slightly tidier article behind a pay wall here. There have been several recent articles particularly in the US context questioning the efficacy of corporate well-being programmes (e.g. here and here with thanks to Brendan Kennelly for suggestions). RAND Europe recently produced a report looking at how various programmes were being implemented in the UK, pointing to a relatively positive view of how they are received by workers but also pointing to the dearth of any effectiveness evidence. In Ireland, the main employers group IBEC have launched a new initiative to promote well-being in the workplace - the Keepwell Mark. I spoke at their launch that also included speakers from companies such as Microsoft Ireland and was attended by hundreds of company representatives. The seeming failure of the tested initiatives in the US to convert into improvements in company productivity and the extent to which many of the initiatives in the US even seem to have backfired and in cases reduced employee morale (e.g compulsory drug testing initiatives reducing trust) should give us pause in the Irish context. Should IBEC be successful in bringing many of the country's employers on board such an initiative, it would provide the opportunity for a serious and structured way of evaluating the impact of various features of well-being initiatives and hopefully the potential to avoid rolling out ones that are going to have harmful effects to both productivity and morale, and ultimately to develop an evidence base on the extent to which well-designed initiatives could have potential benefits and the extent of these benefits.

The declines in infant mortality in Ireland in the 1950s still represent one of the state's major achievements. Improvements in sanitation, in particular, led to healthier maternal, infant, and childhood conditions, setting the foundation both for reducing mortality and improving the health of people as they grew up. At least some of the health improvements we are seeing in our aging populations can be traced to this period. Furthermore, while people have spoken about our health system as being a "black hole", the improvements in life expectancy in the last 30 years have been remarkable, fuelled in part by reductions in smoking and improved nutrition but also by health services, however still flawed, that have substantially improved with the investments made in them by successive governments.

There is increasing evidence for the interplay between health and economic productivity. As might be expected, economists disagree on the precise relationships, but an increasing body of work has related health to economic productivity at both individual and national levels. In the context of aging populations, it seems obvious that improving health will act at least partly as a bulwark against rising dependency ratios, allowing people to work healthily longer into life. One key element of this is the extent to which mental health and chronic pain influence economic outcomes. Depression and chronic pain have dramatic effects on probabilities of unemployment, lost days at work, and life-time wealth accumulation. Mental health might well be the biggest economic concern for the Irish economy in terms of the scope and severity of the effects. Scholars such as Richard Layard have called for major and transformative levels of investments in mental health across countries to understand conditions more and develop and scale-up effective treatments. More broadly, developing workplaces and health services that break the link between mental health and economic deprivation is one of the major tasks of the 21st century.

As well as the implications for economic productivity, there has been an increasing emphasis on how to incorporate health and well-being into policy making as a goal and indicator of progress. A range of high-level reports have asked about how to construct measures that go beyond GDP and economic measures. The incorporation of factors such as literacy, life expectancy, economic inequality and other measures of welfare provides a more rounded account of the progress of nations and has a long history. More recently, the incorporation of measures of subjective welfare and of mental health has become the focus of attention.

The development of workplace programmes to improve health and well-being should be seen in this context, both in relation to their potential role in productivity and as contributing to well-being as an end in itself. So far, such programmes are in their relative infancy. The evidence on the links between well-being and work is very strong but that is different to saying we know how to influence those links. The internet is replete with examples of over-claims about the benefits of introducing health and well-being programmes in work settings. So far, the evidence is slight that productivity can be directly improved by such programmes. There are certainly many studies showing that employees will engage with many of them and enjoy aspects of them etc., But whether investment in worker health and well-being driven by programmatic activity of firms can be part of a major societal shift in well-being and productivity is still an open question.

There are clearly many plausible reasons why providing access to healthier food at work, exercise facilities, health screening, and related services might impact on both well-being and productivity. But there are also pitfalls. Such facilities might only be used by people who are already doing fine in terms of health and well-being. Framed badly, corporate well-being programmes might come across as intrusive or patronising, an attempt to distract from wider issues, or even a subtle hint that worker dissatisfaction is due to their own fitness or mental health issues. Encouraging people to disclose mental health issues to their employer often ignores the fact that many companies have very little idea what to do with such a disclosure and there are risks that people could end up being tacitly discriminated against. Recent reviews of the literature make it clear that there are not simple off-the-shelf models for intervening in worker well-being that will also raise productivity. If this is to be achieved, it will require iteration and commitment to testing, and a willingness to measure and acknowledge failure.

Even with all the above in mind, accumulating evidence on work-place programmes that genuinely have a causal impact on worker well-being and productivity would be a substantial advance for both business and policy in Ireland. Adopting a hard-headed approach to evaluating these programmes will be key.

Liam Delaney is Professor of Economics at UCD and directs the MSc in Behavioural Economics.

Economics, Psychology, and Policy Links 30/09/17

Posted by Economist Channel on Saturday, September 30, 2017 Label:

Our new research group launched on September 8th at an event with Professor Peter John. Our new Msc in Behavioural Economics has also started in UCD. We host a weekly meeting to bring our students and researchers together with other researchers, policymakers, and industry from outside the university and we welcome expressions of interest to attend.

1. The US Internal Revenue Service have produced a guide to using behavioural insights

2. My reading list for students in UCD this term is available here

3. Childhood self-control predicts adult pension participation. Our new paper that came out recently in Economics Letters.

4. Andrew Gelman on whether we should abandon statistical significance

5. The festival of economics and comedy that grew out of Ireland's financial crisis, Kilkenomics, takes place again this year from November 9th to November 12th. I am giving a talk on Father Ted and Economics. This is a one-off and probably not a good idea on my behalf but the overall festival is a really nice event and Kilkenny one of the best places in Ireland to visit.

6. My colleague Orla Doyle and colleagues have released a working paper on terrorism and well-being.

7. Irish Department of Finance & Govt Evaluation Service paper on implications of behavioural economics for tax policy

8. Second issue of the Journal of Behavioural Economics for Policy now available online.

9. Richard Layard on economics & mental health

10. Details of events and mailing list for the Irish Behavioural Science and Policy Network.

Tax Reform

Posted by Economist Channel on Thursday, September 28, 2017 Label: Commentary , Taxes

I read with interest the Unified Framework for Fixing our Broken Tax code. The bottom line is a cut in the corporate tax rate to about 20%, roughly the world average. It also proposes an end to the estate and gift tax.These are small steps in the right direction. It's not a once-in-a-generation clean-out-all-the-junk tax reform.

As an economist I am most saddened by what is missing. Tax reform, designed to support long term growth, should have two main characteristics:

1) Lower marginal rates, by broadening the base. This reduces the disincentives to work, save, invest, start businesses, while raising the same revenue.

2) Simplicity, stability, transparency, and consequent evident fairness. (By fairness I mean each of us knows the others are paying taxes too, and do not suspect that lobbying, political connections, and clever tax lawyers are getting others off the hook.)

These two are essentially missing from the document. The left has seen the tax code pretty much entirely as a vehicle for subsidy and redistribution for a long time. This Republican document, sadly seems to have bought that view. The goal is to

"put more money into the pockets of everyday hardworking people."

Well, without changing government spending, that means less money in someone else's pocket.

I searched for the word "incentive." Here are its occurrences:

"Ending incentives to ship jobs, capital, and tax revenue overseas. ..puts an end to the incentives for shipping jobs overseas...It ends the perverse incentive to keep foreign profits off shore"

"retains tax incentives for home mortgage interest and charitable contributions"

"the framework explicitly preserves ... tax incentives [for]: research and development (R&D) and low-income housing."

Fixing profit repatriation and the incentive to move your business overseas is a good idea, though don't count on it to unleash a wave of investment in the US. I have no idea how it affects "jobs." The second two are the opposite of tax reform. "Marginal" appears once,

Domestic manufacturers will see the lowest marginal rates in almost 80 years.

To be fair, it does say

"Broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes. "

But it does not say which tax breaks and loopholes, other than to say that mortgage interest, charitable deductions, and low income housing are off the table. (With the failure to so much as move Medicaid to a block grant, I don't have much hope for the other big one, the tax deductibility of employer-provided group health insurance.) With the chance of any substantial deduction-financed rate lowering off the table, that's an invitation for everyone to get in touch with their lawyer and lobbyist.

To be fair, it does say

simplicity of “postcard” tax ling for the vast majority of Americans.

But this simplicity comes largely by exempting a swath of voters from any obligation to pay Federal taxes:

the framework simplifies the tax code and provides tax relief by roughly doubling the standard deduction to: $24,000 for married taxpayers filing jointly, and $12,000 for single filers.

The tax code itself gets no real simplification, transparency, or stability.

Ronald Reagan himself understood that corporations pay no taxes. All taxes apparently paid by corporations come from higher prices, lower wages, or lower payments to shareholders. The right corporate tax is zero. Tax people. This document offers

Tax relief for businesses, especially small businesses.

In sum, it pretty much abandons the idea of tax reform, designed to improve "supply side" growth, appropriate for an economy at full employment, in favor of tax cuts, at best a short-run Keynesian stimulator in appropriate for the moment; and it accepts the notion that the basic function of the tax code is to transfer money to or from various groups.

Its reception is therefore predictable.

Binyamin Appelbaum, writing "News Analysis" in the New York Times, not the opinion pages, is titled well, "Trump Tax Plan Benefits Wealthy, Including Trump." It starts

The tax plan that the Trump administration outlined on Wednesday is a potentially huge windfall for the wealthiest Americans. It would not directly benefit the bottom third of the population. As for the middle class, the benefits appear to be modest.

Well, sell a tax plan by its income transfer features, with Democrats who think entirely that way, and no surprise, "tax cut for the wealthy" is all you will hear.

The administration and its congressional allies are proposing to sharply reduce taxation of business income, primarily benefiting the small share of the population that owns the vast majority of corporate equity.

Even the corporate tax is evaluated not by its incentives, but by presumptions about its distributional effect. It's wrong -- only a small share of the population holds stocks directly, but every American who has a pension fund, including government employees, is invested in the market.

President Trump said on Wednesday that the cuts would increase investment and spur growth, creating broader prosperity. But experts say the upside is limited, not least because the economy is already expanding.

Well, sell a tax reform as a "tax cut," whose economic effects come from who gets "money in their pocket" rather than by incentives, and no surprise people evaluate it as a Keynesian tax cut.

I don't dream that the Times and Democratic Party would say anything about a Republican tax plan other than "tax cut for the rich" or think of economic effects in incentive and growth terms rather than Keynesian terms. But one could at least give them an argument to disagree with!

The times Editorial revealed full-on Trump derangement conspiracy theorizing is alive and well. They are happy to speculate in print that the Treasury Secretary, the leaders of the House and Senate, and a little battallion of policy wonks are hard at work on a tax reform proposal all for the purpose of... lowering President Trump's personal taxes.

I found the WSJ editorial a more useful, and balanced summery of the small but definite promise, and the many dangers.

So yes, if this went through, it could be a good step in the right direction. It could show Congress can do something, and could pave the way for a real tax reform. Just as changing Medicare to block grants would have been a good small step in the right direction. I'm consequently not holding my breath.

But I am still (always) optimistic. If this fails, there will be no choice but to embark on a real reform.

Make no small plans for they have no power to stir the soul.

You can always count on the Americans to do the right thing after they have tried everything else.