Author: Greg Mankiw

From Greg Mankiw’s blog:

Well, it appears certain that the healthcare reform bill will become law. One thing I have been struck by in watching this debate is how strident it has been, among both proponents and opponents of the legislation. As a weak-willed eclectic, I can see arguments on both sides. Life is full of tradeoffs, and so most issues strike me as involving shades of grey rather than being black and white. As a result, I find it hard to envision the people I disagree with as demons.

Arthur Okun said the big tradeoff in economics is between equality and efficiency. The health reform bill offers more equality (expanded insurance, more redistribution) and less efficiency (higher marginal tax rates). Whether you think this is a good or bad choice to make, it should not be hard to see the other point of view.

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Is galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple.

Let’s start with first principles. One basic lesson of economics is that prices rise when the government creates an excessive amount of money. In other words, inflation occurs when too much money is chasing too few goods.

A second lesson is that governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall.

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7. In my most controversial NY Times column, I said that what the economy needed was negative real interest rates, which could be accomplished via inflation. A temporary ITC does something similar. By temporarily reducing the effective price of capital goods, it creates expected inflation in this particular price. Under the numerical example above, the effective price of new capital would immediately fall by 20 percent, and expected inflation would rise by 10 percent. If nominal rates stay at zero, the real interest rate measured in units of new capital goods would become negative 10 percent. That is one way to view the way in which a temporary ITC stimulates investment spending.

8. So much for theory, but would it work?  The cash-for-clunkers program is thought by many to have promoted, or at least accelerated, car purchases. An ITC would be similar, but it would apply to business investment rather than personal cars. Instead of targeting a very narrow, politically favored industry, it encourages investment broadly. It should have positive effects on aggregate demand in the short run and positive effects on aggregate supply in the medium and longer run.

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See Also:

• How The Home Buyer Tax Credit Is Bankrupting The FHA
• That $8,000 Tax Credit Actually Costs $43,000 For Every New Home Buyer
• Why Is The Fed Happy Buying All Those Mortgages? Because You’re Guaranteeing Them!