Saturday, October 5, 2013

Strange shutdown analysis

A couple of items caught my eye recently.

First, Menzie Chinn at Econbrowser discussed the estimated fiscal drag of the shutdown here.  He measures the drag on GDP based on foregone federal payrolls.  He mentions that multipliers will make this drag even larger, but notes that if the government employees receive back pay, the damage will be mitigated.

This exposes an important distinction between the private economy and public expenditures.  The monetary value of voluntary private transactions can be presumed to generally reflect the minimum value of the transactions.  But, we account for public expenditures the same way, even though with public expenditures this presumption can't be made.

You might notice that the one thing he doesn't concern himself with is whether those federal employees are doing anything useful.  In fact, by noting that back pay would mitigate the damage he is explicitly arguing that what they produce is not important.

He may be right that the measure of GDP will be affected by the shutdown.  But, to the extent that he is right in this analysis, GDP is a completely useless measure.  This kind of decline in GDP would have no bearing on our standard of living, and I'm not even sure if it would have much of an effect on asset markets, interest rates, etc.  In essence, this argument (and it seems to be a common argument) says that taking money from one citizen and giving it to another in the private economy is not production (GDP doesn't grow when you win a bet), but if the same transfer is made as a public expenditure it is production.  In fact, with multipliers the production is presumed to be even more than the amount of the transfer.

This seems especially wrong in this case, where I think this would more reasonably be treated as an unexpected one-time tax on federal employees.  I believe that the evidence shows that this kind of tax would provide federal revenue without creating the kinds of deadweight loss that other taxes generally create.  The federal employees will not change their spending habits, but will decrease their savings in response to the one-time tax, so that consumption will not decrease markedly.  And they will eventually compensate for this by working more to reestablish their lost wealth, creating GDP growth.

Further, as Scott Sumner would argue, the multiplier is actually near zero because of monetary offset.  And the Fed seems to be extending QE3 as a result of these fiscal difficulties.  So, let's say the Fed is adding monetary stimulus because of these Keynesian ideas about public expenditures; and let's say that the shutdown is actually a stimulative one-time tax on some federal employees.  The Republicans may have actually found a way to trick the Fed into finally being as stimulative as they should be.  Let's have a shutdown for a few more months!  The next published unemployment report will be in December, with reported unemployment coming in at 6.7%, and we'll be dancing in the streets!

The second item was a discussion I heard on NPR about the medical device tax, which the Republicans are making a part of the shutdown issue (here's a depressing earlier story).  The debate was framed as an argument between those who want the tax in order to make Obamacare revenue neutral and those who want to negate the tax because it will hurt the medical device industry.

The only winner in that debate are influence peddlers.  And the loser is everyone else.  That is the outcome regardless of what the practical result of the debate is.

The actual debate should be between having transparent, fair, minimal taxes and having opaque, arbitrary, targeted taxes.  But that's not a fair debate.  The former is the unalloyed winner of the debate in principle, and Obamacare is 10,000 pages of the latter.  The public exchanges have just opened up and it looks like we are building up to a vote on the medical device tax that will break bi-partisan, based on which Congressional members count medical device manufacturers as supplicants.  Who says this is a do-nothing Congress?

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