Joyful Complexity

From R. Randolph Richardson's Green Energy Tax cuts blog:
Emphasis mine.

All the above clearly applies to the current debate over whether corporate tax cuts should be included in the stimulus package, with critics making the same textbook arguments that businesses might save rather than invest the tax cut, while federal spending is surely spent.

However, it seems to me that when the Mankiw hypothesis is applied to corporate tax cuts, (which is a cleaner thought experiment than a payroll tax in that we don't need to consider the employee tax cut aspect) not only does it become crystal clear that Mankiw MUST be right about price changes boosting investment demand, but that there is an additional market mechanism in play here, boosting both aggregate demand and hence the tax multiplier.

Let's follow the chain of cause and effect: corporate tax cuts would mean higher after-tax earnings; since earnings determine stock prices through P/E ratios, higher earnings would signal a immediately higher market value for each corporation and the stock market as a whole (this is the change in relative prices favorable to capital investment that Mankiw mentions); rising values will pull investors back into the market (Mankiw's rising demand for capital goods).

At this point, additional equity and debt market multipliers kick in: some of the new investors will use debt for leverage (creating an additional credit market multiplier) or pull money out of savings (in contradiction to textbook models that result in low multipliers). Further, a rising stock market generally means rising consumer spending and demand as individual see their net worth recover and deferred needs become pressing. Essentially this link between stock markets and aggregate demand creates is a powerful equity market multiplier boosting overall demand (by non-Keynesian channels) well beyond the value of the original tax cut. By way of illustration, at a P/E ratio of say 10, a $1 corporate tax cut earnings increase creates an increase of roughly $10 in stock market and personal net worth valuation: that is a very powerful demand stimulator. Further, as with the new investment, the new consumption will also be partly financed from debt or savings, credit markets again boosting the tax multiplier. Lastly, rising demand would further determine that corporate tax cuts would be invested, not saved, again, in direct contradiction of the textbook expectations. Indeed, facing stronger demand, businesses would not only invest their tax cuts, but seek more equity and debt financing, creating an additional leverage multiplier. Higher stock valuations (the direct result of tax cuts) would further allow corporations to borrow more money more cheaply.

By contrast, no such equity+credit market multiplier effect could be plausibly attributed to federal spending, which seems instead to actually crowd out private investment. At nearly every step of this chain of causation, we further see that the textbook Keynesian assumption that the tax cut will be used for saving rather than investment is powerfully contradicted, that the tax cut is not only fully invested but also attracts additional debt or equity financing at three different levels: that of the investor, consumer and corporation.

How does this work out in the current market? Doing the math, we see that cutting combined federal-state corporate rates 15 percentage points from the present 39% to say 24% (making US rates in line with average corporate rates in OECD countries) would raise corporate after-tax earnings by about 24.6%. If P/E ratios are stable, it is likely that both corporate valuations and stock markets would rise by roughly the same percentage, around 24.6%, in a fairly short period. If the current market floor is at about DOW 8000, that implies that a 15% corporate tax cut would raise the value of the DOW to just under 10,000. This number could be higher if P/E ratios rise (as is usually the case in rising markets) or if a significant portion of investors use leverage. Subsequent rising demand could further boost the Dow significantly above 10,000, driving a powerful positive feedback loop that boosts demand and GDP further. However, I leave it up to others to quantify these multipliers.

From Philip Greenspun's blog (blogs.law.harvard.edu):

Prices are still falling. Prices will keep falling because they are still too high compared to incomes and rents. A safe mortgage is a maximum of 3 times the buyer's yearly income, yet mortgages have been 5 to 10 times incomes in the last few years. A landlords' rule of thumb is that a house should cost a maximum of 15 times the annual rent it can bring in, yet in coastal areas, sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that reflects what people can really pay, not how much they can borrow. So prices will keep falling for a long time. Anyone who bought a "bargain" this time last year is already sitting on a very painful loss.

 Never have I gone into a movie with these many expectations and hype and never have I been this blown away. I have to, no I need to see this movie multiple times to even put together my thoughts together in a coherent manner. The script, the complex plot(s), the dialogue, the cinematography, the acting, the vision, the music - oh the haunting score of Hans Zimmer and James Newton Howard, Heath, the action, the realism (screw CGI!) - wow, simply wow. 

Going for the second viewing tonight, IMAX is sold out for the rest of the week here in San Francisco. The might Titanic may finally tumble.

Just when I thought the hype over The Dark Knight couldn't get any crazier. The movie is absolutely sold out this weekend. Theaters across the country are adding 3:30am and even 6am (cock-a-doodle-do) showtimes to pack in the audiences. And believe it or not, even those shows are sold-out at the local AMC Metreon! Unbelievable! We may finally see the completely undeserving Spidey 3 fall from it's all-time highest grossing opening weekend mantle. The magic number appears to be $151,116,517.

On a more personal note, I guess I could watch it on a regular screen instead of IMAX, but c'mon. If Nolan could make the effort to shoot it for IMAX I damn well better watch it in IMAX. (Plus the IMAX theater is only 4 blocks away : )
I guess I'll have to wait for this one. Now you know why I'm so serious.

Update: Managed to snag a couple of IMAX tickets for Sunday (7/20). But when my buddy checked an hour later they were gone!

Update II: My buddy managed to get the 10am tickets and convinced me (it wasn't that hard ; ) to do the same. So now I will be watching 2 back to back IMAX screenings! WB better not have fucked this up.

Steve Jobs:

“iPhone 3G had a stunning opening weekend,” said Steve Jobs, Apple’s CEO. “It took 74 days to sell the first one million original iPhones, so the new iPhone 3G is clearly off to a great start around the world.”