While AUD broke above the trend line, the RSI divergence shown earlier in the 240 minute chart remain valid for the next week as well.
It has reached 100% of Fib. extension and risk remains for a sharp correction.
Friday, January 20, 2012
AUD Tags 100% Fib.
While AUD broke above the trend line, the RSI divergence shown earlier in the 240 minute chart remain valid for the next week as well.
It has reached 100% of Fib. extension and risk remains for a sharp correction.
Thursday, January 19, 2012
A Bend In The Road?
The last two days were really hectic with no internet connection and fifteen hour flight etc. As such I could not post anything and my apologies for the absence.
In the mean time, the stock market in USA has been a one way street. It has so far defied all logic and divergences. It has gone from extreme to further extreme. But such extremes are not backed by any fundamentals. We all know that seasonality pushes the stock prices higher at this time of the year but usually there is a correction during mid-January which has not happened yet.
I was looking for SPX 1300+ during the 1st week of January but it did not come then. I was also expecting a mild correction and continuation of the rally in the 1st week of February. So far the correction has been elusive. The problem with such situation is that without a correction not much upside can be expected in February.
I wanted to check if my models are totally wrong or are they just ahead of time. (Just like Prechter!) One of the best ways to check is to find out what other Gurus are saying. These are the people who have track record little better than Prechter and while nobody is correct all the time, it is better when success rates are higher than failure rate.
So I first turned to Charles Nenner. According to Mr. Nenner the short term upside price target for Emini is 1312. And today ES reached a high of 1311.5. We will see if Mr. Nenner is right this time.
Next I turned to Tom Demark. He gave an interview in Bloomberg on December 22nd. You can view it here; http://www.bloomberg.com/video/83290816/ . His upside price projection for SPX is 1313-1340.But he also expected to reach this target by the 1st week of January. One interesting point made by him is if SPX takes out the high of October 27, then it will create three successive high and that will be the top. We have now satisfied his two conditions for a top. We have reached the upside price target and SPX has created three successive highs as seen in the following chart.
Another person who makes a very good use of analog is Eric Swarts. The following chart is from him.
According to his analogy, the top was in today with pull back imminent before a final push in February. That fits well with my original model.
I also wanted to see what FX is doing. AUD has been my favourite indicator for SPX with a very high (almost 99% in 2012) correlation.
From the daily bar it seems that an AUD/USD top is either in place today or will be with one more try. It is at the falling resistance level and at the top of the triangle.
On the other hand USD has been falling from the start of the year and has now created an inverse HS pattern. The DJ-USD index support is at 9900 level and it seems that support is going to hold. While I do not expect DJ-USD index to run away over 10200 levels immediately, I think it will test the neck line as early as next week.
Bottom line, I am continuing with my short position. There are times when the model gets extended and I think now is one of those times. So instead of looking for the bottom by 20th January, I will now look for a short term bottom by around 24th – 26th January and then go for final pop in a long while by the 1st week of February.
Thank you for your encouraging comments and emails and for visiting http://bbfinance.blogspot.com/ .Please join me in Twitter (@BBFinanceblog) to get an unbiased market analysis filtered of noise. Share it/ forward it/ retweet it to your friends and circle. We will see how the market goes in the next few days but we will prevail. For now let me catch up with some sleep.
Stimulus and Etiquette
The stimulus wars are heating up again.
I wrote my last, and I thought best, summary blog piece "Stimulus RIP" in November 2010, (all my stimulus posts here), but a previous 2009 post seems to be behind a new outburst of blog activity. I won't get it all, but some contributors are David Glasner, Scott Sumner, Kantoos , Brad DeLong and of course, Paul Krugman
Some response seems called for.
Stimulus
Let's be clear what the "fiscal stimulus" argument is and is not about.
It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits -- one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget.
Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course. A good test: If China offers to deliver an infrastructure project at half price, but no "jobs" will be "created," do you still want it? If you say "yes, even more" than it's infrastructure. If you say "no, we need to create jobs" then it's stimulus.
The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare. Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5. Yes, endorsed by Krugman because it "feels like a job" (his back must not hurt like mine does) and by DeLong: "anything that boosts the government's deficit over the next two years passes the benefit-cost test--anything at all."
The "targeted," "infrastructure," and the whole worthy apparatus to monitor the wisdom of "stimulus" spending (see John Taylor) is, in the Keynesian model, beside the point, or at best a smokescreen to befuddle the ignorant masses. It would in fact be better if the money were stolen. Thieves have high marginal propensity to consume, and they can get that "spending" out fast in an economy with few "shovel-ready" projects.
Stimulus is a remarkable proposition, because micro fallacies morph into macro wisdom. We all lambaste mayors who tax small businesses (or borrow against future taxes) to build showpiece "jobs" projects. This way lies Buffalo. Yet for the economy as a whole, stimulus says, it's true. The hurricane should have been bigger, so the government would have spent more money to rebuild. Many stimulus advocates point to WWII spending. Think about what that means: all those tanks, ships, and airplanes on the ocean floor were not a terrible economic sacrifice we paid to win a desperate war. Every ship the Germans sunk let the government buy another ship, and gain a ship and a half worth of GDP in the process!
Such paradoxes are sometimes true in macroeconomics and finance -- for example, we can individually sell stocks, but collectively we can only drive down prices. But you can see how hard the proposition is once you understand it and pull back the smokescreen-- and how delectable "stimulus" is for politicians who love to build those "jobs" projects even when they are a net drain.
On silence
I've been off this issue for a while, mainly because fiscal stimulus is so clearly off anyone's policy or economic agenda. The US is not about to deliberately borrow another few trillion dollars a year and send it down whatever rathole is handy in the name of stimulus. The Administration won't even use the word "stimulus" anymore. Europe is even less likely to do it. Krugman, amazingly, thinks Greece should be spending more.
Everyone else sees our task as avoiding a global sovereign-debt crisis.The fascinating macro economic question is why our "short run" recession seems to be turning in to "long run" stagnation and slow growth. Lack of government spending is not high on most people's lists.
So, fiscal stimulus doesn't seem worth much blogging effort to me. It's just off the menu. We might as well debate a gold standard vs. bimetallism.
The state of affairs
Stimulus still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now, as typically happens after any event makes the news.
Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't. Some of those models have huge holes in them (the standard IS LM model, which even Krugman admits is "ad hoc"). Some don't. The rather mysterious "New Keynesian" stimulus models could use a lot of investigation (More in an upcoming post.)
Even if stimulus works, when and for how long? A lot of models give more stimulus when interest rates are stuck at zero. But many advocates, like Krugman and Delong, want more government spending even for times and for countries (Greece) with high interest rates. Surely too much spending eventually leads to debt crises or strangling taxation, but when? (Then, advocates usually want inflation and devaluation, but that has a limit as well.)
The facts are far from decisive. The right says: "The government spent like a drunken sailor and we still had an awful recession. Stimulus Failed" The left says "It would have been way worse without the stimulus." History does not paint a clear picture either. GDP rose a lot along with Government spending at the beginning of WWII. GDP didn't fall like a stone at the end of WWII. Economists are producing hundreds of papers and volumes of studies for us to sort through, which I'll review in the future, but cause and effect will always be hard to tease out in economics.
So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works. That's what makes being an economist fun! There is a lot that well-read thoughtful economists can do to summarize and contribute to this debate.
Etiquette
What help do we get from Krugman to help us understand this debate, sort out the assumptions and the facts?
(The issue is how saving = investment is achieved, and what happens out of equilibrium. Keynesian models specify that "plans" depend on income, and do not have to add up via a budget constraint -- you can "plan" to consume save and pay taxes more than your income. Income then adjusts until saving equals investment. In "classical" models, "plans" are called "demands" and have to add up to income. Prices adjust to clear markets. In "new Keynesian" models, those prices are sticky. I'm simplifying drastically here for public consumption, so Brad and Paul, spare us the outburst on what a moron I am or that I didn't mention x assumption.)
"No model" is even more ridiculous. What, there is no economic model in which fiscal stimulus falls below 1.5? Or we somehow "don't have" the models in our graduate reading lists, and in the footnotes to my blog posts? "Barro, Kydland and Prescott, King and Baxter, King,Plosser, and Rebelo, Uhlig,.Taylor, don't exist?... Maybe those models are wrong. Maybe they are logically coherent but don't fit the data. But to say they don't exist is just ridiculous!
Then there are the insults and slander.The most hilarious are the doctor-heal-thyself accusations:
There is a lot of uncertainty in macro, both theoretical and empirical. There is a huge outpouring of serious work. How does it help at all to say your side has perfect wisdom, enshrined in a roughly 1975 vintage ISLM model, and everyone who disagrees, including Lucas, Prescott, Fama, and so forth is stupid, lying, doesn't understand econ 1, thinks 2+2=5, or in the pay of wall street? A worthy analysis investigates how sensible people can come to both views, and then isolates which assumptions or facts they differ on. (Something I haven't done here for lack of space, but will return to later.)
What is wrong with these people?
I'm not the first to notice this emptiness of argument, and they're starting to be defensive. It's ok to slander and insult, because, as Krugman writes and Delong Endorses " This is not a game, and it is also not a dinner party; you have to be clear and forceful to get heard at all." It's all necessary because "Economic policy matters" .
What self-important hogwash! Life is a dinner party -- at least if your goal is the truth, and you have a bit of humility to understand our limits and still be searching for it. Didn't your mothers tell you that? "Because it matters" is precisely why it's important to acknowledge our limitations and search politely for the answers.
Note to the blogosphere: This is not how real economists discuss things. I've had great and productive interactions with Austan Goolsbee, Mike Woodford, David and Christina Romer among many other serious economists who are favorable to stimulus. Nobody calls anyone else a moron. Normal people behave this way. They can do so even if communicating via the internet.
The question is, what is wrong with the rest of us that we pay so much attention?
Well, I'm done for a while, but I will return to stimulus soon, trying to digest the outpouring of thoughtful academic work on both sides. I realize I didn't get much into the theory or facts about stimulus, but this is a reaction blog post not an encyclopedia, so that will have to wait for another day.
I wrote my last, and I thought best, summary blog piece "Stimulus RIP" in November 2010, (all my stimulus posts here), but a previous 2009 post seems to be behind a new outburst of blog activity. I won't get it all, but some contributors are David Glasner, Scott Sumner, Kantoos , Brad DeLong and of course, Paul Krugman
Some response seems called for.
Stimulus
Let's be clear what the "fiscal stimulus" argument is and is not about.
It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits -- one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget.
Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course. A good test: If China offers to deliver an infrastructure project at half price, but no "jobs" will be "created," do you still want it? If you say "yes, even more" than it's infrastructure. If you say "no, we need to create jobs" then it's stimulus.
The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare. Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5. Yes, endorsed by Krugman because it "feels like a job" (his back must not hurt like mine does) and by DeLong: "anything that boosts the government's deficit over the next two years passes the benefit-cost test--anything at all."
The "targeted," "infrastructure," and the whole worthy apparatus to monitor the wisdom of "stimulus" spending (see John Taylor) is, in the Keynesian model, beside the point, or at best a smokescreen to befuddle the ignorant masses. It would in fact be better if the money were stolen. Thieves have high marginal propensity to consume, and they can get that "spending" out fast in an economy with few "shovel-ready" projects.
Stimulus is a remarkable proposition, because micro fallacies morph into macro wisdom. We all lambaste mayors who tax small businesses (or borrow against future taxes) to build showpiece "jobs" projects. This way lies Buffalo. Yet for the economy as a whole, stimulus says, it's true. The hurricane should have been bigger, so the government would have spent more money to rebuild. Many stimulus advocates point to WWII spending. Think about what that means: all those tanks, ships, and airplanes on the ocean floor were not a terrible economic sacrifice we paid to win a desperate war. Every ship the Germans sunk let the government buy another ship, and gain a ship and a half worth of GDP in the process!
Such paradoxes are sometimes true in macroeconomics and finance -- for example, we can individually sell stocks, but collectively we can only drive down prices. But you can see how hard the proposition is once you understand it and pull back the smokescreen-- and how delectable "stimulus" is for politicians who love to build those "jobs" projects even when they are a net drain.
On silence
I've been off this issue for a while, mainly because fiscal stimulus is so clearly off anyone's policy or economic agenda. The US is not about to deliberately borrow another few trillion dollars a year and send it down whatever rathole is handy in the name of stimulus. The Administration won't even use the word "stimulus" anymore. Europe is even less likely to do it. Krugman, amazingly, thinks Greece should be spending more.
Everyone else sees our task as avoiding a global sovereign-debt crisis.The fascinating macro economic question is why our "short run" recession seems to be turning in to "long run" stagnation and slow growth. Lack of government spending is not high on most people's lists.
So, fiscal stimulus doesn't seem worth much blogging effort to me. It's just off the menu. We might as well debate a gold standard vs. bimetallism.
The state of affairs
Stimulus still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now, as typically happens after any event makes the news.
Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't. Some of those models have huge holes in them (the standard IS LM model, which even Krugman admits is "ad hoc"). Some don't. The rather mysterious "New Keynesian" stimulus models could use a lot of investigation (More in an upcoming post.)
Even if stimulus works, when and for how long? A lot of models give more stimulus when interest rates are stuck at zero. But many advocates, like Krugman and Delong, want more government spending even for times and for countries (Greece) with high interest rates. Surely too much spending eventually leads to debt crises or strangling taxation, but when? (Then, advocates usually want inflation and devaluation, but that has a limit as well.)
The facts are far from decisive. The right says: "The government spent like a drunken sailor and we still had an awful recession. Stimulus Failed" The left says "It would have been way worse without the stimulus." History does not paint a clear picture either. GDP rose a lot along with Government spending at the beginning of WWII. GDP didn't fall like a stone at the end of WWII. Economists are producing hundreds of papers and volumes of studies for us to sort through, which I'll review in the future, but cause and effect will always be hard to tease out in economics.
So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works. That's what makes being an economist fun! There is a lot that well-read thoughtful economists can do to summarize and contribute to this debate.
Etiquette
What help do we get from Krugman to help us understand this debate, sort out the assumptions and the facts?
- Here: "Lucas/Cochrane made simple, fail-an-undergrad-quiz-level, errors."
- Here: "The nonsense problem" Cochrane and Luas don't have a "defensible model."
- Here: "The great Lucas made a nonsense argument by any standard"
- Here: "Oh, and the Cochrane-Fama thing ...there doesn’t seem to be a model behind it, just a misunderstanding of what accounting identities mean"
- Here: Again, "no model".
- Say's Law., Say's Law, Say's Law and "Economic Barbarism". I and Lucas are "propounding Say’s Law — the idea, refuted 75 years ago, that all income must be spent and hence that supply creates its own demand"
- Here: "New Keynesians understand New Classical models, but New Classicals don’t"
(The issue is how saving = investment is achieved, and what happens out of equilibrium. Keynesian models specify that "plans" depend on income, and do not have to add up via a budget constraint -- you can "plan" to consume save and pay taxes more than your income. Income then adjusts until saving equals investment. In "classical" models, "plans" are called "demands" and have to add up to income. Prices adjust to clear markets. In "new Keynesian" models, those prices are sticky. I'm simplifying drastically here for public consumption, so Brad and Paul, spare us the outburst on what a moron I am or that I didn't mention x assumption.)
"No model" is even more ridiculous. What, there is no economic model in which fiscal stimulus falls below 1.5? Or we somehow "don't have" the models in our graduate reading lists, and in the footnotes to my blog posts? "Barro, Kydland and Prescott, King and Baxter, King,Plosser, and Rebelo, Uhlig,.Taylor, don't exist?... Maybe those models are wrong. Maybe they are logically coherent but don't fit the data. But to say they don't exist is just ridiculous!
Then there are the insults and slander.The most hilarious are the doctor-heal-thyself accusations:
- Krugman calls me, by name, a "Mendacious idiot"; though hilariously swearing "I've never gone ad-hominem;"
- He writes that I rest on "credentials" to spout nonsense and "pull rank" or "argue from authority" -- Cochrane argues from authority, rank and credentials, Mr. I-have-a-Nobel-Prize-so-you're-a-moron?
- "Chicago has both forgotten basic macroeconomics and become so politicized that when it comes to policy, people literally can’t think straight" Chicago has become politicized? (Also factually untrue. Look at our faculty list. Goolsbee works here, there are many to the left of him. We hire quality, not politics.)
- He writes, in print in the New York Times, that I (we) write for "sabbaticals at the Hoover Institution and job opportunities on Wall Street?" I accept the challenge: 1040 forms at 20 paces. We'll see who gets paid how much by whom to write what.
- The first of a long set of posts complainig that Bob Lucas "smeared" Christina Romer by suggesting that maybe her defense of stimulus after about two weeks on the job might have been requested by the White House. A "Smear!" Heavens!
- He opines, "when it comes to Cochrane, or Brian Riedl, there’s no there there"
There is a lot of uncertainty in macro, both theoretical and empirical. There is a huge outpouring of serious work. How does it help at all to say your side has perfect wisdom, enshrined in a roughly 1975 vintage ISLM model, and everyone who disagrees, including Lucas, Prescott, Fama, and so forth is stupid, lying, doesn't understand econ 1, thinks 2+2=5, or in the pay of wall street? A worthy analysis investigates how sensible people can come to both views, and then isolates which assumptions or facts they differ on. (Something I haven't done here for lack of space, but will return to later.)
What is wrong with these people?
I'm not the first to notice this emptiness of argument, and they're starting to be defensive. It's ok to slander and insult, because, as Krugman writes and Delong Endorses " This is not a game, and it is also not a dinner party; you have to be clear and forceful to get heard at all." It's all necessary because "Economic policy matters" .
What self-important hogwash! Life is a dinner party -- at least if your goal is the truth, and you have a bit of humility to understand our limits and still be searching for it. Didn't your mothers tell you that? "Because it matters" is precisely why it's important to acknowledge our limitations and search politely for the answers.
Note to the blogosphere: This is not how real economists discuss things. I've had great and productive interactions with Austan Goolsbee, Mike Woodford, David and Christina Romer among many other serious economists who are favorable to stimulus. Nobody calls anyone else a moron. Normal people behave this way. They can do so even if communicating via the internet.
The question is, what is wrong with the rest of us that we pay so much attention?
Well, I'm done for a while, but I will return to stimulus soon, trying to digest the outpouring of thoughtful academic work on both sides. I realize I didn't get much into the theory or facts about stimulus, but this is a reaction blog post not an encyclopedia, so that will have to wait for another day.
Joe Fahmy: Relative Strength Trading Webinar
Great educational (and free) TraderInterviews.com video webinar with Joe Fahmy on trading high relative strength stocks in healthy markets.
Joe is one of my favorite trading follows on Twitter and we've also highlighted some of his blog posts and interviews here in the past.
So with that introduction, you should know that I'm posting this video because I've learned a lot about the stock market and trading from Joe in recent months. You'll probably walk away from this webinar with some knowledge that you can use in your trading as well.
Fahmy offers a quick summary of his general trading philosophy at the start of the webinar, then quickly launches into a discussion of his relative strength concept. You'll hear Joe explain why he looks for growth stocks that are emerging as leaders when the overall indexes are bottoming or consolidating. He also offers a few keys to successful trading and ends with a solid Q&A session with the webinar group.
Check it out, and be sure to follow Joe's blog and tweets at the links above.
Related articles and posts:
1. Trading psychology: interviews with Joe Fahmy & Phil Pearlman - Finance Trends.
2. Kirk Report interview + Q&A with Joe Fahmy - The Next Big Move.
Wednesday, January 18, 2012
Romney's 15%
Romney's 15% average income tax rate is all over the news, with the usual "tax the rich" outrage.
Romney pays little income tax because, hold on...Romney has little income. The guy doesn't work. He lives on his investments and campaigns for President. If I took a year off of teaching to go on a round-the-world gliding tour, I wouldn't have much income either, and would pay little income tax.
(We're all guessing here, of course -- maybe it's all crafty shelters. But who cares about Romney anyway; the issue at stake is whether the US should substantially raise rates on everyone else's interest, dividends, capital gains, or wealth itself, in addition to estate and property taxes.)
Yes, from an economic perspective, interest, dividends and capital gains are not "income." Romney should pay taxes, and at least at the same rate as everyone else. He should pay taxes on his consumption, not the returns on his investments.
A central proposition in the economics of optimal taxation is that the tax rate on capital should be zero or close to it. Like anything else in economics, there is a huge literature of ifs ands and buts, yet the result seems fairly robust. (Google "optimal taxation of capital." This is not a political statement, there are thousands of pages of equations behind it. There is a separate "optimal taxation" literature on "optimal redistribution," with some equally surprising results that I'll write about some other day.)
Intuitively, this is related to the theorem that you shouldn't tax intermediate goods, or have tariffs for moving goods around the country. Romney's income was taxed once, when he made it. It's not efficient to tax it again, because he chose to save it rather than spend it immediately on an orgy of houses, private jets, and a big vacation for his extended family.
If you made money in dollars, paid taxes, then went to Canada and got $1.20 Canadian, it would make no sense to say "you made 20 cents of income, we'll tax it." It makes no more sense to pay taxes again on money that is moved over time. We decry that Americans don't save enough, the Chinese, the trade deficit and so on. Well, if you want people to save more, stop taxing it.
For this reason, the U.S. Tax code has been slowly reducing the taxation of rates of return. Capital gains and dividends are now taxed less than ordinary income. IRAs, 401(k), 526, and a welter of other devices allow people to save and invest without paying taxes on the rates of return. (It would be much simpler to just eliminate taxes on rates of return, but then the lawyers and accountants would have nothing to do.) Dividends are finally taxed at the same rate as capital gains. Estate taxes have been slowly and chaotically lowered.
Taxes on capital and wealth also are singularly unproductive of income, and very productive of tax shelters.
It's been a slow and painful process. And now, about to be undone, for no good economic reason.
Obviously, economists need to communicate better. Economists in general need to keep reminding everyone to look at tax rates, distortions and incentives first and foremost, not taxes. Opinion writiers like Paul Krugman's post on the subject don't do the world a favor by deliberately forgetting this basic principle when it is politically convenient.
Romney pays little income tax because, hold on...Romney has little income. The guy doesn't work. He lives on his investments and campaigns for President. If I took a year off of teaching to go on a round-the-world gliding tour, I wouldn't have much income either, and would pay little income tax.
(We're all guessing here, of course -- maybe it's all crafty shelters. But who cares about Romney anyway; the issue at stake is whether the US should substantially raise rates on everyone else's interest, dividends, capital gains, or wealth itself, in addition to estate and property taxes.)
Yes, from an economic perspective, interest, dividends and capital gains are not "income." Romney should pay taxes, and at least at the same rate as everyone else. He should pay taxes on his consumption, not the returns on his investments.
A central proposition in the economics of optimal taxation is that the tax rate on capital should be zero or close to it. Like anything else in economics, there is a huge literature of ifs ands and buts, yet the result seems fairly robust. (Google "optimal taxation of capital." This is not a political statement, there are thousands of pages of equations behind it. There is a separate "optimal taxation" literature on "optimal redistribution," with some equally surprising results that I'll write about some other day.)
Intuitively, this is related to the theorem that you shouldn't tax intermediate goods, or have tariffs for moving goods around the country. Romney's income was taxed once, when he made it. It's not efficient to tax it again, because he chose to save it rather than spend it immediately on an orgy of houses, private jets, and a big vacation for his extended family.
If you made money in dollars, paid taxes, then went to Canada and got $1.20 Canadian, it would make no sense to say "you made 20 cents of income, we'll tax it." It makes no more sense to pay taxes again on money that is moved over time. We decry that Americans don't save enough, the Chinese, the trade deficit and so on. Well, if you want people to save more, stop taxing it.
For this reason, the U.S. Tax code has been slowly reducing the taxation of rates of return. Capital gains and dividends are now taxed less than ordinary income. IRAs, 401(k), 526, and a welter of other devices allow people to save and invest without paying taxes on the rates of return. (It would be much simpler to just eliminate taxes on rates of return, but then the lawyers and accountants would have nothing to do.) Dividends are finally taxed at the same rate as capital gains. Estate taxes have been slowly and chaotically lowered.
Taxes on capital and wealth also are singularly unproductive of income, and very productive of tax shelters.
It's been a slow and painful process. And now, about to be undone, for no good economic reason.
Obviously, economists need to communicate better. Economists in general need to keep reminding everyone to look at tax rates, distortions and incentives first and foremost, not taxes. Opinion writiers like Paul Krugman's post on the subject don't do the world a favor by deliberately forgetting this basic principle when it is politically convenient.
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