Character of the 2009 tax cuts

It's hard to piece together exactly what the stimulus bill recently passed by the House stipulates in terms of tax cuts. But as the Wall Street Journal reports, it appears that the centerpiece is a temporary tax cut of $500 for working individuals ($1,000 for families) that phases out with income above $75,000 per worker. The tax cut won't be sent out in a lump-sum like the 2008 rebate; rather, federal withholdings from paychecks will fall, increasing periodic take-home pay by a smaller amount.

There are many other facets of the stimulus bill as well, as reported here and elsewhere.

Martin Feldstein has weighed in against the bill's current form given its high price tag, and among other things he cites the apparently dubious track record of temporary tax cuts toward spurring spending. I've seen all kinds of estimates of the spending-per-rebate-dollar associated with the 2008 cut, and Feldstein cites 15%.

The authors of the bill seem to be banking on the premise that a smaller but more sustained increase in income, however temporary, will result in more spending. This is clearly the behavioral economics perspective that has appeared in the New Yorker, which I wrote about recently.

The marriage market during the downturn

Yesterday's NY Times included an article reporting strains among New York couples with one partner in financial services given the impacts of the financial crisis. It wasn't clear whether the cause of the romance downturn was really a shortage of cash or of confidence; the last line speaks volumes:

“It’s not even about a $200 dinner,” Ms. Petrus said. “It’s that he’s an alpha male, he’s aggressive, he’s a go-getter, he doesn’t take no for an answer, he’s confident, people respect him and that creates the whole mystique of who he is.”

If it is the reduction in cash and in $200 dinners, you would think groups other than bankers would suffer similarly during recessions. (Doesn't $200 seem a little low for a banker? Maybe she meant a daily average, not a special night out.)

And you'd also think that the shockingly large 2008 bonuses dealt out on Wall Street would lift some (romantic) spirits.

A behavioralist view of income, wealth, and spending

The New Yorker's James Surowiecki writes about the psychology of spending and saving in the context of gauging the impact of fiscal stimulus programs, citing the work of Richard Thaler, among others.

It stands in stark contrast to the view on spending from the perspective of permanent income hypothesis of Milton Friedman and others, which suggests that consumers respond to changes in their wealth, or permanent income, and not much to temporary blips in income, which are small relative to wealth.

Polyglot path dependence and health insurance systems

Atul Gawande writes in the Jan 26th New Yorker about the importance of historical events in shaping national health insurance systems. He discusses how Britain, for example, ended up with a de facto national system because of the blitz.

As he points out, economists like Paul Krugman and others have recognized the importance of path dependence in, for example, patterns of industrial clustering. What's worrisome to an economist is how path dependence might well lead to an equilibrium where optimality, as we perceive it in its fundamental form as equating marginal costs and marginal benefits, does not necessarily occur.

Ironically, of course, optimality could be in the eye of the beholder. Toward the very end of his piece, Gawande rejoices that "[f]or the past year, I haven’t had a single Massachusetts patient who has had to ask how much the necessary tests will cost...." To an economist, it is worrisome when consumers don't know the prices they face, although Gawande may implicitly believe that the doctor does know and will optimize. But I'm not so sure.

Economic stimulus: Consumption vs. investment

Gene Steuerle, long an advocate of fiscal responsibility, writes about declining investments in children and implicitly calls for that pattern to be reversed during our efforts to jump-start the macroeconomy.

He certainly has a good point, one that was also raised a quarter-century ago by Sam Preston in his 1984 PAA presidential address. Both Steuerle and Preston are either implicitly or explicitly referring to the growth in old-age support programs like Medicare and Social Security at the expense of youth support like education, S-CHIP, etc.

Could massive aid to state and local governments, which in our federal system are virtually the only gateways through which youth support flows, pass the Congress this spring?

Rents in Manhattan, pubs, and Irish immigration

The Emerald Inn is a pub on the Upper West Side of Manhattan where I used to grade exams during my first year at Queens College. On Monday, the Times reported that it was granted a rent reprieve by its landlord and got another 2-year lease at affordable rates.

It's the type of place without loud music and high turnover, which probably explains in part why a large rent increase would have done them in. There's no mention of wages specifically, but I wonder whether another explanation is that its labor costs are not at rock bottom like other establishments'. Why might that be the case?

It's an Irish pub, owned by Galway Irish, and according to a current waitress quoted in the article, "you used to have to come off the boat to wait the tables." But given Ireland's rapid economic growth in recent years, it is surely the case that low-wage Irish immigrants have become much more rare. By comparison, it certainly appears that many other food and drink establishments are staffed by immigrants from other countries --- where wages have not risen as dramatically.

Does this potential link imply that Chinese restaurants might be the next to be priced out of Manhattan, after another few decades of growth in China? The thing is, restaurants can always hire workers from different ethnicities. In Berkeley, ethnic Chinese seemed to run most of the highly variegated local restaurants around the university.

Jobs, distance, and Skype

On Friday, the Times reported on a set of married couples in which the partners lived in different cities, sometimes different continents altogether. The Current Population Survey data they cited categorized some 3.8 million people married but with spouse absent in 2006, compared with 119.1 million married with spouse present.

The article cites Skype (and telephones) as a key method of staying in touch across vast distances. It also discusses requisite changes in parenting strategy. The absent spouse typically becomes the "good cop" with the kids.

It's hard to know whether living apart is a trend, as the title, "Living Apart for the Paycheck," seems to suggest given the current economic bad times. But anecdotally the prevalence of physically separated spouses on the academic job market certainly seems high. Many of the couples in the article include academics.

Forecasting and business cycles

An article today in the Times discussed private sector economists' forecasts for 2009, many of which are at least pink-colored if not relatively rosy. But I don't think there are many economists alive today who are legitimately proficient at forecasting business cycles. So much of common forecasting techniques involve extrapolating reversions to trend.