American Exceptionalism

I believe in American Exceptionalism. At least I believe the possibly wrong interpretation I read where God chose America to be the dominant democracy over the last few hundred years.
What I take exception to is that we deserve it. Americans should be humble, not proud. A system was put in place at the founding of this country that let us succeed in spite of ourselves. It's misplaced to be a proud American, flaunting our superiority and encouraging isolationism.
The downfall of America won't be the expansion of the welfare state, it will be declining morality. This can manifest itself in corruption and isolationism when we move to the right, or free-riding in our welfare state if we move to the left.
As long as we are in moral decline, our exceptional status is in jeopardy.

Marginal Tax Rates Matter

Even for me they matter. Consider this decision I recently had to make:

Should my family hire a cleaner or do the work ourselves? My wife has the option of working more or less in a given week depending on or other home tasks such as cleaning and taking care of the kids. Economic efficiency dictates that everyone in the economy should do what they are best at. This means the decision of whether to hire cleaners should come down to whether my wife could make more money doing work she enjoys than we'd spend on cleaning.

Unfortunately this decision is greatly distorted by our marginal tax rate:
the decision pre-tax is easy:
1 hour of work = $35
1 hour of housecleaning = $25
Our AVERAGE federal tax rate (including payroll taxes) is only about 23%, but the tax rate on each ADDITIONAL (those subject to marginal tax rates) hour of work my wife does is much higher, more like 36%

so our decision is now between spending the same $25 or making $35*(1-.36)=22.4

What if the government, instead of giving us a bunch of deductions just charged us our average tax rate on every hour of work.

Well then the decision is between $25 or making $35*(1-.23)=26.95.

Now we make the decision to hire a cleaner, the cleaner gets work, we work more, and the government makes more money.

This is the biggest thing I see wrong with Obama's speech tonight. A whole lot more economic efficiency could be had if we just lowered rates and eliminated deductions in a revenue neutral manner - even if we choose the baseline of revenue from Clinton era rates on the rich we could still do it with lower rates.

What Drives Healthcare Costs

Fully 3/5ths of health care is paid for by the government today. The most expensive is health care for seniors. If we want to lower health care costs for seniors, we have to stop covering some procedures. Ezra Klein criticizes Paul Ryan's proposal to privatize Medicare, saying that seniors will be less and less able to afford care because of the slower growth of the subsidy provided to buy insurance. How much does Medicare drive up health care costs today, though? What Klein ignores is that today we throw a huge amount of money at a finite resource to keep up the quantity of Medicare, which drives up costs for everyone. What happens when we decrease the this amount over time? Won't health care costs grow at a slower rate? How much slower? Yes, people with less money will have have more basic care, but what is the alternative?

Any solution has to involve a decrease in quantity of care. Whether you believe, as Ezra does, that a technocrat can decide for the whole country what care we should or shouldn't have, or you are with Ryan and think that people should decide on their own what they do and don't want covered is the argument. Klein seems to be framing the argument as the unsustainable version of Medicare we have today vs. what Ryan wants, which is misleading.

Hyperinflation Continued

David Leonhardt re-iterates - no hyperinflation without wage inflation. What's more likely is some short term inflation which hopefully brings real wages down a little bit, and diminishes the real value of debt on the books a little bit. Just the way uncle Ben designed it.

Krugman and Taylor Talk Past Eachother

This exchange between Krugman and Taylor is interesting:

http://johnbtaylorsblog.blogspot.com/2011/03/investment-and-unemployment-reply.html
http://krugman.blogs.nytimes.com/2011/03/30/more-on-unemployment-and-investment/
http://johnbtaylorsblog.blogspot.com/2011/03/investment-and-unemployment-over-longer.html
http://krugman.blogs.nytimes.com/2011/03/31/two-slumps-in-business-investment/


But they miss each-others points I think.
Taylor concludes that business investment causes employment. I think this is absolutely true - we know new and growing businesses are the biggest drivers of employment. But I don't think Krugman is arguing against this. Taylor does not address WHY businesses would invest when they have excess supply. Also, why do employment (his latest graph seems to present coincident data for investment and employment) always lag the economy overall.

But Taylor doesn't dismiss these either, his prescription is just to remove impediments to business investment. Of course this can't hurt, but what this argument comes down to is what IS the impediment to business investment. I suspect it's a range of things, but there are probably SOME things they can both agree on that we should absolutely do - reduce corporate tax rates and pay for them by removing market distorting credits like those for ethanol producers, remove barriers to trade, clean up and simplify regulations.

Instead this argument comes down to just another tired back and forth about whether government deficits are always bad, or whether they are good in a slump.

Update:

Justin Wolfers makes a pretty convincing case that the correlation is a relatively recent phenomenon - and that Taylor is cherry picking a little bit. Intuitively Taylor's position makes more sense to me, though I'm not sure I agree with his prescription.