Dc to cambridge2

DC to Cambridge: Help!Big Questions DC Wonks Need Academics to Help Answer Jared Bernstein Center on Budget and Policy Priorities 3/21/12 bernstein@cbpp.org

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…”

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

The Lower Your Income, the More Full Employment Helps You

These dynamics have led to diminished opportunities for less advantaged households. 17Source: Whither Opportunity, Russell Sage

Enrichment Expenditures: music and art lessons, books, sports, tutoring. Source: Whither Opportunity? Russell Sage 18

Dif=0.45 Dif=0.31From Baily, Dynarski, Chapter 6, Whither Opportunity 19

Has the Rate of Mobility Declined? Sources: Katherine Bradbury, 2011 20

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

Dc to cambridge2

by jaredbernstein on Mar 21, 2012

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