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…”
No correlation between budget deficits/GDP and 10-yr T-bill rates 14 14 12 12 10 10 TENYR_TREASTENYR_TREAS 8 8 6 6 4 4 2 2 -12 -10 -8 -6 -4 -2 0 2 4 -12 -10 -8 -6 -4 -2 0 2 4 DEF_GDP DEF_GDP2 (Wrong slope, but not significant)--Orszag/Gale find positive correlation using “forward 10-year rates” and projected deficitsas share of projected GDP (see next slide) but James Galbraith points out that theirregressions are not very robust to the use of actual interest rates.
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 GreaterIneq, 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