Public Finance and Society

Quote of the day;

“… public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare — and this and more is written in its fiscal history.” He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. “the budget is the skeleton of the state stripped of all misleading ideologies.”

Back to Basics- Personal Income Tax

Figure 1 Basic Income: Flat Tax

Figure 2 The Government's Budget Constraint

Figure 3 Optimal Tax Rate

Figure 4 Maximum Tax Rate

Figure 5 Marginal Tax Rate on Top Income

For the Student- Personal Income Taxation: From Theory to Policy;

The main change in the approach to taxation came from the later integration of public finance into the general area of welfare economics, which was itself a major concomitant of the successful introduction of a utility-maximising approach to exchange in the 1870s. However, the most systematic early developments came from Cohen-Stuart in 1889 (Cohen-Stuart 1958) and Edgeworth (1897) in investigating the broad implications for progressivity of the minimisation of total disutility from taxation—ignoring any possible benefits. With the criterion of minimising total sacrifice, progression arises from decreasing marginal utility, but with equal absolute sacrifice, it depends on the precise behaviour of the marginal utility of income. Even here, there was no explicit independent role for redistribution: the maximand was strictly considered to be total utility.

This movement reached its ultimate conclusion in the 'optimal tax' literature, beginning virtually a century after the initial introduction of a utility analysis into economics. The mathematical analyses of Edgeworth were extended by allowing, in particular, for labour supply incentive effects of taxes and transfers, and including a range of specifications of the objectives of taxation, thus introducing an explicit redistributive role.8 In this final development, most of the important criteria suggested by Smith and others were ignored. The relevant branch of welfare economics into which optimal tax theory falls is the theory of the 'second best', in view of the fact that the government is unable to tax individuals' endowments of ability and instead taxes their incomes. Sometimes, stress is placed on asymmetric information aspects, in that the government cannot observe ability levels

Who is Chalmers Johnson?

The idea of the Developmental State is most closely associated with Chalmers Johnson and his seminal analysis of Japan’s very rapid, highly successful post-war reconstruction and reindustrialization. Johnson’s central contention was that Japan’s quite remarkable and historically unparalleled industrial renaissance was neither a fluke nor inevitable, but a consequence of the efforts of a Developmental State. A developmental state was one that was determined to influence the direction and pace of economic development by directly intervening in the development process, rather than relying on the uncoordinated influence of market forces to allocate resources. The developmental state took it upon itself the task of establishing substantive social and economic goals with which to guide the process of development and social mobilization. The most important of these goals, in Japan’s case, of course was the reconstruction of its industrial capacity, a process made easier by widespread consensus about the importance of industrial development.
The emphasis has to be placed on the influence over the direction and pace of development by directly intervening in the development process, rather than relying on the uncoordinated influence of market forces.

- Address by the Minister in The Presidency: National Planning Commission, Trevor Manuel, at the Wits Graduate School of Public Development Management

For Discussion: Where's South Africa heading?

Assorted

Cato Journal, Volume 28, Number 3, Fall 2008

Small States: Not Handicapped and Under-Aided, but Advantaged and Over-Aided

Cold Case Files: The Athenian Grain Merchants, 386 B.C.

Financial decisions are heavily influenced by early experiences

Ms Malmendier and Mr Nagel examined detailed survey data about American households’ finances between 1964 and 2004. Because they knew when the people in the sample were born, they could calculate the average stockmarket returns and inflation that individuals had experienced over the course of their lives. And because the data tracked financial choices over time, they could also control for factors like age, which matters because the composition of people’s portfolios is likely to change as they grow older.

Their work confirmed the Depression babies idea. Under identical market conditions, and controlling for age, people who had experienced lower stockmarket returns over the course of their lives put a smaller fraction of their money into stocks than people who had lived, on average, in times when stocks had done better.

Lords of Finance: The Bankers Who Broke the World
By Liaquat Ahamed

These early central bankers were an odd lot. Norman, who dabbled with spiritualism, apparently informed a colleague that he could walk through walls. He suffered regular nervous breakdowns, and was actually on sick leave when Britain left the gold standard again in 1931. Strong suffered from permanent ill health and was often affected by the generous use of morphine to control pain. He died in October 1928 before the Wall Street Crash and the Great Depression, but Mr Ahamed does not appear to believe that things would have turned out any differently had he lived: in a crushing conclusion, he writes that the Great Depression was “the direct result of a series of misjudgments by economic policymakers…by any measure the most dramatic series of collective blunders ever made by financial officials.” Looking back in 1948, Norman’s judgment was no less harsh. “We achieved absolutely nothing,” he said, “except that we collected a lot of money from a lot of poor devils and gave it to the four winds.”...

But the most original solution was that of President Franklin Roosevelt, soon after his inauguration in 1933. Mr Ahamed resurrects a 59-year-old agricultural economist from Cornell University by the name of George Warren, whose study of long-term trends in commodity prices led him to believe that, since falling prices were associated with depression, recovery ought to be encouraged by rising prices. The president liked the idea and decided to devalue the dollar—despite vigorous opposition from the gold bugs—simply by increasing the gold price. One of his own economic advisers lamented: “This is the end of Western civilisation.” For a number of weeks, the president would consult his advisers over boiled eggs at breakfast and randomly drive up the gold price, beginning at $31.36 an ounce until it settled at $35. By then a recovery was under way.

Financial Modelers' Manifesto

~ I will remember that I didn't make the world, and it doesn't satisfy my equations.

~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.

~ I will never sacrifice reality for elegance without explaining why I have done so.

~ Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.

~ I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

Fuzzy Inaugural Math;

In my print column this week, I examine whether president-elect Barack Obama will break the record for inaugural crowd size, and if he does, whether we’ll know for sure. The Washington, D.C., mayor publicly aired a projected crowd size of up to four million soon after the election, but today no government agency will get behind an official number, nor is anyone planning to produce an official count on Inauguration Day.

McKinsey on decision making

Take this new McKinsey survey on how companies make good decisions, on issues such as whether they should enter a new market or buy a competitor

Questioning Techniques for Productive Problem Solving

Obama at GMU;

Only government can break the cycle that is crippling our economy, where a lack of spending leads to lost jobs, which leads to even less spending, where an inability to lend and borrow stops growth and leads to even less credit.

Save or Spend: Connecting the Personal to the Macro

Memo to President-Elect Obama: Three Steps for Restoring Democracy to Zimbabwe

Zimbabwe's Funny Money and the Astrophysics of Hyperinflation

The Best Stimulus?

Electricity cost puzzles

Obama Nominees, Take Note;

Remember that most of the hearing will be more about the questioners than about you. Prepare a short opening statement -- no more than five minutes -- outlining the president's goals and your goals for the department. Submit a longer "think piece" for the record.

Practice over and over, even when talking with your spouse or neighbors, saying: "Mr. Chairman . . . if confirmed . . . working with this committee I will . . . ."

While prepping, develop an answer to the one question you do not want asked. Count on someone asking it. What in your background might haunt you if made public? That, too, surely will be raised.

Six critical competencies the new political appointees will need to succeed;

4. Leading Others

A presidential appointment is always about leadership. And leadership is about attracting and motivating followers. Author Antoine de Saint-Exupery said, "If you want people to build a ship, teach them to long for the endless immensity of the sea." An appointee should build networks of career employees, stakeholders, members of Congress, Capitol Hill staffers and private citizens - and then inspire them to launch the ship of presidential goals.

Federal Reserve Assets Decline

Measuring the trilemma's configurations over time

Acemoglu: The Models are Broken

History Lesson: Evolution of Checks

The Evolution of the Check as a Means of Payment: A Historical Survey;

This article traces the historical evolution of the check, focusing on its relation to complementary and competing payment technologies.

Originating in the eastern Mediterranean during the first millennium as a convenient form of payment between local merchants, checks became more versatile through the development of negotiability in sixteenth-century Europe. The suppression of banknotes in eighteenth-century England further promoted the use of checks. In the United States, nineteenth-century legislation discouraged other payment methods and eventually led to a nationwide check payment system. In the twentieth century, under the Federal Reserve's leadership, checks expanded rapidly and became the nation's default payment method.

The authors discuss some persistent historical themes surrounding checks: checks' ease of use, which provides advantages over other payment methods but creates risk to businesses and banks; checks' sophistication, which evolved through centuries of legal precedent and operational experimentation; and checks' high costs relative to other forms of payment.

Checks' traditional dominance of the U.S. payment system, the authors conclude, resulted from historical happenstances. These events gave the check relative advantages that are only now being overcome by electronic payment technologies.