Dc to cambridge2

DC to Cambridge: Help!Big Questions DC Wonks Need Academics to Help

Answer

Jared BernsteinCenter on Budget and Policy Priorities

3/21/[email protected]

And this is just the tip of the iceberg:

• Keynesian Stimulus

• Budget Deficit and Crowding Out

• Supply-Side Tax Cuts vs. Need for Revenue

• Income Inequality: Why is It a Problem?

From Romer, 2011, Hamilton College Remarks

CBO Modeling

5

Cost of Getting This Wrong

6

Crowding Out?

• Literature is mixed; you can find the result you seek.• Certainly makes sense, but lots of moving parts, including

increased access to global capital (US current acct imbalance fractional in early 70s; much higher now).

• China currency peg• Cycle, flight to safety dominates• Fed offsets• Better argument is simply “sustainability”—eventually, you

have to pay for what you spend. • Key word is “eventually”—temporary Keynesian spending is

not the problem!• But Congress does badly with “eventually…”

2

4

6

8

10

12

14

-12 -10 -8 -6 -4 -2 0 2 4

DEF_GDP

TE

NY

R_

TR

EA

S

2

4

6

8

10

12

14

-12 -10 -8 -6 -4 -2 0 2 4

DEF_GDP2

TE

NY

R_

TR

EA

S

No correlation between budget deficits/GDP and 10-yr T-bill rates

--Orszag/Gale find positive correlation using “forward 10-year rates” and projected deficits as share of projected GDP (see next slide) but James Galbraith points out that their regressions are not very robust to the use of actual interest rates.

(Wrong slope, but not significant)

Gale, Orszag, 2004: Budget Deficits, National Saving, and Interest Rates

Supply-Side Tax Cuts

• No one finds elasticities large enough for supply-side cuts to pay their way.

• Impacts tend to be on taxable income—Romer/Romer: 0.2%;

• Saez et al estimate optimal tax rates on top earners MUCH higher than current rates.

• Need for revenues; many supply-siders embrace Bowles-Simpson

• 1986 moment (lower rates, broaden base)?

Saez et al: Lowering Top Marginal Tax Rate Associates with Greater Ineq, Not Faster Growth

Source: Piketty, Saez, Stantcheva, 2011 12

Income Inequality

• What’s wrong with it?

• Newer evidence: Blocks opportunity/mobility?

• Significant role for full employment but how to achieve?

Inequality Hits Middle and Low Incomes

• Inequality has gone up and that has contributed to higher poverty and stagnant growth in middle-incomes.

Full employment

14

15

The Lower Your Income, the More Full Employment Helps You

These dynamics have led to diminished opportunities for less advantaged households.

Source: Whither Opportunity, Russell Sage17

Enrichment Expenditures: music and art lessons, books, sports, tutoring.

Source: Whither Opportunity? Russell Sage 18

Dif=0.45

Dif=0.31

19From Baily, Dynarski, Chapter 6, Whither Opportunity

Has the Rate of Mobility Declined?

Sources: Katherine Bradbury, 2011 20

Is this Brynjolfsson/McAfee’s Race Against the Machine—acceleration of capital intensivity?