AMERICAN.COM

At the beginning of the year I predicted:

President Obama will push for comprehensive tax reform and reach out to Republicans to do it.

Now Joe Wiesenthal reports on Wall Street chatter that Obama might push for an October surprise of tax cuts.

Stay tuned.

Reihan Salam has an extremely interesting blog post asking if the United States will become “the Old Country” from which young people emigrate for places that are more attractive and hospitable to talent.

Will your children emigrate from the United States? Louis Uchitelle’s story on Scott Nicholson and “the elusive American dream” was widely criticized. And Scott’s grandfather did sound a bit loopy when he said the following:

“I view what is happening to Scott with dismay,” said the grandfather, who has concluded, in part from reading The Economist, that Europe has surpassed America in offering opportunity for an ambitious young man. “We hate to think that Scott will have to leave,” the grandfather said, “but he will.”

I doubt that Europe is offering ambitious young men more opportunity than the U.S., though perhaps Estonia or Poland are a decent bet. I can, however, imagine a scenario in which other countries start succeeding in their efforts to attract U.S. talent.

One element of Reihan’s scenario is excessively high marginal tax rates might encourage resourceful, wealthy Americans to park their human and financial capital overseas. Reihan’s post is penetrating and deeply insightful and you should RTWT.

An important consideration that Reihan doesn’t discuss is the effect not just of the tax burden but the cumulative effect of other relative obstacles to a nation’s entrepreneurial culture. Consider this blog post, “Why I’m giving up on Europe and moving my startup to China“:

I was leaving all this behind—this engineering efficiency, this orderliness, this sanity. As the plane jumped into the air, my heart dropped and my eyes struggled to hold on to some part of this place. Then the wing came between me and the ground and that quick silence fell over the plane—the silence that means you are no longer leaving, you have now left.

Hong Kong would be the next stop.

I was sitting in the Airbus A380. The largest airplane in the world, built in Europe by European engineers. A technical marvel that could have been built almost nowhere in the world apart from Europe or the U.S. Why would I leave the place with such a high engineering standard for a place that is still the wild west of engineering?

Because life in China is like living in a startup and life in Europe is like being in a big company.

Europe, and in particular Germany, is a very controlled place. There is a ministry that is responsible for everything—from registering your company through declaring your profits, there are a large number of rules and regulations that you need to know about, and they will come down hard on you if you get them wrong.

These rules are also very difficult to discover and very difficult to implement correctly. From the situation with healthcare for your employees through to filing your taxes correctly, the amount of paperwork is insane and complex.

There are so many little ‘unfreedoms’ in europe that seems insignificant, but together they add up to a society that advocates safety over freedom. All these rules and regulations are there to protect people from harming themselves, but the end result is a nice, peaceful society in which you have several well regulated ways to bore yourself.

The author is not speaking of the United States, but with a few twists and wrinkles he could one day write a similar tale about the land of opportunity. And the author acknowledges the huge advantages of comfort, ease, security, and technological advance to be had in the West. And this is what should worry us. It might not be just the higher marginal tax burden that Reihan worries about that will push enterprising people away. It’s the slow but steady erosion of a culture of freedom and open-endedness at the hands of countless large and small “unfreedoms.”

Image by Mark Lacoste.

Will Federal Reserve Chairman Ben Bernanke, at his speech today at the Fed’s symposium in Jackson Hole, Wyoming, announce the possibility of negative interest rates? It doesn’t seem likely, but he could and—if you are seriously worried about deflation—should.

Alan Blinder, in yesterday’s Wall Street Journal (“The Fed Is Running Low on Ammo”), suggested that it “may sound crazy, but central bank reserves can pay negative interest rates.” He’s certainly right. As discussed in more detail in my May 2009 article, “Why Not Negative Interest Rates?” negative interest rates not only are theoretically possible, but have actually occurred. (Of course, interest rates can be negative in real or inflation-adjusted terms, while still positive in nominal terms. What we mean here are negative nominal interest rates.)

So, although people often write about the “zero bound” for interest rates, in fact interest rates do not have a zero bound. For a situation which combines significant deflation with a high load of debt—a toxic combination—negative interest rates may be just what the doctor should order.

The obvious candidate for where to establish negative interest rates is indeed on excess reserves being held by banks at the Fed—at the moment about $1 trillion in idle funds. These represent the banking equivalent of stuffing currency in the mattress. If banks were faced with negative interest rates on these deposits, as Blinder suggests, it would increase the incentive to make loans or investments instead.

In June 2003, Fed Governor Bernanke asked, “whether it would make sense tactically to say publicly that we are willing to lower the federal funds rate to zero if necessary … there would no longer be a feeling in the market that we have reached the end of our rope.”

In August 2010, one could similarly ask “whether it would make sense tactically to say publicly that we are willing to go to negative rates if necessary … there would no longer be a feeling in the market that we have reached the end of our rope.”

Could the Fed chairman be willing to say that? We’ll see.

Image by Cliff1066.