Could higher interest rates help the economy?

We live in an age when central bankers grace magazine covers like pop stars. But what if they don’t actually know what they are doing? In the United States, at least, quantitative easing and low short-term interest rates may have done as much harm as good.

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A literalist approach to “supply-side” economic policy

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Europe at the edge

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EuroTARP or Euro-trip?

In the wee hours of Thursday morning, European leaders agreed on a plan to shore up the continent’s banking system and stem the contagion affecting sovereign borrowing costs in every country from Greece to France. The plan has three parts: the European Financial Stability Facility will be expanded to about 1 trillion euros, Greek bonds held by private banks will be “volunarily” exchanged for new bonds worth half as much, and the banks most affected will get about 100 billion euros to strengthen their capital positions.

It sounds impressive. Two indicators will show whether it is enough: the spread between Italian and German borrowing costs and the share prices of French banks. So far, neither has meaningfully improved—with good reason. The “plan” has not really been finalized. More worryingly, even if it is implemented in full it would fail to address the fundamental problems plaguing the financial system.

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Some thoughts on Herman Cain’s 9-9-9 Plan

The existing U.S. federal tax code is a monstrosity. According to the IRS, Americans spend more than 3% of GDP on compliance costs each year. The deductions and exemptions in the existing code favor some industries over others and some behaviors over others. Why should Google and GE pay only a few percent of their profits in taxes when Wal-Mart has to pay nearly 40%? Why should a financier pay a lower tax rate than a doctor?

Unsurprisingly, many people have called for replacing the tax code with something simpler and more fair. One alternative that has recently been featured in the news is the 9-9-9 plan devised by Republican presidential candidate Herman Cain.

How does it compare to the current system? What are its assumptions? Are the criticisms justified? Would it accomplish its objectives?

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A few issues with U.S. corporate tax policy

We know that the U.S. federal government collects revenue from individuals in a manner both arbitrary and opaque. Its taxation of companies is even less transparent and more distortive.

Some get handsomely subsidized for doing what they would do anyway, while others get penalized for being in an unfavored industry.

Just to make matters worse, the current system makes us more vulnerable to financial crises than we otherwise would be.

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The lessons of the baby-sitting co-op reconsidered

During the depths of the Asian Financial Crisis, Professor Paul Krugman wrote an essay for Slate where he argued that central banks can prevent recessions by manipulating interest rates. To make his point, the professor used a real-life example of a baby-sitting cooperative from the 1970s. It is well worth reading, particularly the second footnote at the bottom.

The original article on which Krugman’s piece was based is even more interesting. The authors came to a very different conclusion from the professor, however, which has significant implications for today’s debates on monetary policy and the economy.

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