Moneybox

Another piece of good-but-not-great economic news: "In the week ending February 18, the advance figure for seasonally adjusted initial claims was 351,000, unchanged from the previous week's revised figure of 351,000. The 4-week moving average was 359,000, a decrease of 7,000 from the previous week's revised average of 366,000."

This 350k figure we're hovering around isn't the most torrid number in American history, but it's very consistent with non-recessionary circumstances and an improving labor market picture. Worries remain Europe and gas prices, but note that collapse in Europe tends to push gas prices down.

New York State has the highest cigarette taxes in the nation, which also means it features the most aggressive tax avoidance schemes. For a while the state's Indian tribes maintained that they could retail nationally recognized cigarette brands on tribal lands without paying the tax, a legal position the state never recognized and that they had trouble gaining support for. The new idea is that they can import tobacco from the Carolinas and then make the cigarettes on trival land and sell them on the cheap. Andrew Cuomo's administration maintains that this is illegal, but has not in practice done anything to move against it.

This is a reminder that while the "Laffer Curve" does not characterize taxation in the United States as a whole, it probably does apply to cigarette taxes in the highest tax jurisdictions. The combination of success in pushing people to quit smoking and success in pushing smokers to come up with ways to avoid paying the taxes has pushed revenues below what could be gained. In public health terms, that's all fine, but for a while higher cigarette taxes were a rare form of politically palatable revenue-raiser and that's increasingly difficult to make work.

The latest sign that the PC business has entered a generalized phase of decline comes from Hewlett Packard's latest quarterly earnings report in which they say revenues fell 7 percent "and down 8% when adjusted for the effects of currency."

The internals cast an even more negative light on the PC sector. They show 30 percent growth in HP's software division, 15 percent growth in HP Financial Services, and 1 percent growth in services. Those healthy units mask a disaster elsewhere as "Personal Systems Group (PSG) revenue declined 15% year over year with a 5.2% operating margin" and "Imaging and Printing Group (IPG) revenue declined 7% year over year with a 12.2% operating margin." All of which is to say that there's plenty of money to be made in the neighborhood of what HP does, but the basic business of building and selling computers and peripherals isn't what it once was.

Regional mini-burger chain White Castle is experimenting with adding wine to the menu at one Indiana location. This in a way makes sense as small burgers ("sliders") seem to be all the upscale rage these days, making a little pairing seem sensible. But I don't really see this trend taking off. The article notes that the wine-serving White Castle features table service because that's required by state law. And that, it seems to me, is precisely why large fast food chains tend not to offer alcoholic beverages—the relevant regulations vary quite a lot from place to place and are often very burdensome so it makes sense to keep things simple and stay away from the booze.

That said, if booze sales at fast food joints did become more of a regular thing it could upend the industry. At upscale restaurants food is largely a loss-leader for a business that makes its real profits on beverages. Fast food gets some of that with the fountain sodas, of course, but an expanded roster of beverage offerings would drive things further in that direction. Currently the need for food to pay its own freight is one reason there's such a focus on keeping food costs low, which often badly compromises quality.

I recently noted some problems with the Economist's specific claim that the Obama administration is doing too much to prevent companies from dumping particulate emissions into the atmosphere, and Assistant Treasury Secretary Jan Eberly has penned a blog post taking issue with the general claim that the overall regulatory environment has worsened under Obama. She observes that they relied on a study of "regulatory quality" and then just assumed that quality is identical with stringency of rules:

However, in defense of earlier administrations and careful measurement, a closer look at the study shows that it confuses low regulatory quality (as measured by the World Bank) with regulatory stringency. By this twist of definition, the study implies that Somalia, being virtually lawless, has the most stringent regulations in the world, explaining its poor economic performance, while those with the highest quality regulation, like the Netherlands and Canada, are interpreted to have the loosest regulation. Moreover, the same study implies that primary education is an even worse burden on the U.S. economy than regulation, reducing GDP by more than $3 trillion annually.

So what can we learn from the World Bank measure of regulatory quality? Using their most recent data, from the beginning of the survey in 1996 to 2010, the U.S. index has not strayed from its 95 percent confidence interval–put simply, it hasn’t changed. Using the underlying data from the article you cite, the regulatory deterioration emphasized by the Economist is simply a nonevent.

Something I find frustrating about this conversation is the presumption that there's some kind of lump of regulation that's either too strict or not strict enough, too complicated or insufficiently detailed. It's perfectly consistent to think that we overregulate who is allowed to cut hair for money while underregulating air pollution.

A lot of the discussion around the U.S.-China currency valuation controversy can leave a person with the impression that what you want as a country is to have the cheapest possible currency. After all, that will make your goods very "competitive" and gain you lots of jobs, especially valorized export-oriented manufacturing jobs. The reality is that having an expensive currency can be a valuable thing indeed. Brazil has spent the past several years combining catch-up economic growth with a floating exchange rate that's made the real much more valuable and now Brazilians are buying up Manhattan:

Already, eight of the 181 condo units in their building have been bought by fellow countrymen, part of a Brazilian buying spree in New York that shows no sign of slowing. The city is already teeming with Brazilian tourists, and many of them, flush with cash from a booming economy back home, are snapping up their own pieces of Manhattan. [...]

“For many, Manhattan is their dream town,” said Marcos Cohen, a Brazilian broker at Prudential Douglas Elliman who said he had closed more than 15 deals over the past two years for Brazilians paying from $5 million to more than $15 million for Manhattan apartments. For Ms. Benz’s husband, a native of Rio de Janeiro who works at a São Paulo investment fund, buying a New York apartment was a passion project.

Nobody should get the impression that the typical Brazilian is buying a $5 million apartment in Manhattan. But what holds for rich Brazilians is true up and down the income ladder. Traveling abroad, buying stuff made in foreign countries, or purchasing real foreign investment assets is getting cheaper thanks to the strength of the currency. This is what China has been missing out on (to an extent) thanks to its currency undervaluation, and that's one reason why it's been smart of China to allow this quiet reduction in the level of undervaluation.

As I was saying, the problem with the universal consensus around the desirability of closing corporate income tax loopholes is that everyone loves corporate income tax loopholes. For example, the Obama administration's plan to close loopholes and lower rates ends up strongly endorsing the existing and popular R&D tax credit, strongly embracing the newly controversial clean energy tax credit, and dreaming up a plan to expand deductions for domestic manufacturing:

Effectively cut the top corporate tax rate on manufacturing income to 25 percent and to an even lower rate for income from advanced manufacturing activities by reforming the domestic production activities deduction. Reflecting manufacturing’s key role in innovation and the intense international competition facing the sector, the president’s Framework would reform the current domestic production activities deduction. It would focus the deduction more on manufacturing activity, expand the deduction to 10.7 percent, and increase it even more for advanced manufacturing. This would effectively cut the top corporate tax rate for manufacturing income to 25 percent and even lower for advanced manufacturing.

This proposal comes after a bunch of text about how awesome manufacturing is. And manufacturing is pretty awesome. But is it more awesome than software? More awesome than curing disease? I dunno.

Noam Scheiber today excerpts one of the most interesting finds from his excellent book The Escape Artists which you should buy and read if you want to understand the economic policymaking process in the Obama administration. It's not as sensationalistic as Confidence Men, but it's better. The find in question is that Christina Romer initially wanted to say to the president during the transition winter of 2008-09 that a $1.8 trillion stimulus was needed to fill the output gap, but Larry Summers—without disagreeing with her—decided that it would be poor bureaucratic politics to present such a large figure as the high-end range. His calculus was not merely that $1.8 trillion would be politically infeasible in terms of the U.S. Congress, he felt it would be infeasible in terms of the internal politics of the Obama administration, which according to Scheiber featured a split at the very beginning between a Romer/Summers desire to go big on stimulus and Geithner/Orszag concern about freaking out financial markets. Summers wanted to win the inside policy argument, and thought that heading in with a lower ask would make that more likely.

It is of course easy to second-guess Summers at this point or leap directly to the question of what kind of difference it might have made if Obama had come to Congress with the $1.8 trillion ask. But it's also interesting to consider the possibility that Summers was correct, and that if he and Romer had presented Obama, Rahm Emannuel, and David Axelrod with Romer's original memo that they would have gotten dismissed as cranks and the "pivot to deficits" would have come even sooner.

I see this all as part of a story about how what people actually believe about things matters. There's a long and complicated story about how the Affordable Care Act came to be enacted into law. But a very short version of the story is that the vast majority of people operating at a high level in the Democratic Party sincerely believed that enacting some kind of universal health care program into law was a good idea. By contrast even though we've now spent years debating macroeconomic stabilization policy, it just wasn't the case that as of December 2008 there was overwhelming consensus among Democrats about the utility of running large budget deficits during a period when the natural rate of interest falls below zero. There seems to have been lots of ambivalence among members of congress, among high-level political operatives, to an extent among economic policy hands, and up to and including the president of the United States about this. If there was consensus, you'd have started with the fact that the $1.8 trillion idea had a lot of practical problems with it, everyone would have set about trying to solve the practical problems (giant tax cut works both politically and institutionally) and on we'd go. But there was no consensus so from the very beginning the idea was beseiged by politicking and tactical gambits.

This afternoon, the Obama administration is going to be formally rolling out its corporate income tax reform proposal, bringing to the front of public debate my very least favorite tax policy issue. But for the record, the deal with the corporate income tax is that it's leveled at a high rate (35 percent!) but it doesn't actually raise very much revenue because only suckers actually pay that rate.

Only suckers pay the rate because there are lots and lots and lots and lots of available deductions. This in turn creates two problems. One is that if you're in a line of business that isn't well established and hasn't already created lots of loopholes for itself, you're now paying a much higher tax rate than other kinds of firms. This discourages capital from flowing into entrepreneurial activities. The second is that it gives firms a very large incentive to focus time and resources on tax avoidance. A great productivity-enhancing innovation might boost profits by 3 percent, but that may be peanuts compared to the return on lobbying for a new loophole that shelters your existing profits from taxation.

So what we ought to do is close loopholes and lower rates. But of course there wouldn't be any loopholes if not for the fact that there were large blocks of members of congress who wanted to create them. And in the American political system it's much harder to change things than to block change, so change tends not to happen.

The other problem is that voters have confused ideas about this. "Make the corporations pay!" sounds good to people, even though "the corporations" as such don't end up paying. But conversely, creating a tax credit for each individual thing a company might realistically do also sounds good. Research and development! Hiring workers! Investing in capital goods! Who doesn't like that stuff? So nobody actually wants to lower the rate and nobody actually wants to eliminate loopholes even though everyone agrees that we ought to lower the rate and eliminate loopholes. Got it? An interesting theoretical question is who actually does pay the corporate income tax? Does it fall on workers? On owners of land? On owners of capital? I can assure you that after reading a few papers on this thanks to the National Bureau of Economic Research's search tools that the answer is credible researchers disagree and the answer is highly sensitive to modeling assumptions!

Fun, right?

Just one of several fascinating pieces of information in Irin Carmon's piece on contraceptive policy:

After all, for higher-income women, the rate of unintended pregnancy has declined since 1994 by 29 percent; unintended pregnancies among women living below the federal poverty line rose 50 percent in the same period.

That's probably not purely a result of financial barriers to obtaining more effective forms of birth control, but it helps illustrate the kind of social problems that can at least be ameliorated by the provision of more comprehensive preventive health care services to people of all incomes.