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Jason Furman and Larry Summers:
Dear colleagues, please explain your letter to Steven Mnuchin: Dear Colleagues:
You recently wrote an open letter to Treasury Secretary Steven Mnuchin quantifying the economic impact of tax reform. We are interested in and surprised by your analysis. We share your commitment to the idea that well-designed tax reform can make the economy stronger and that careful economic analysis is essential. And we know that you all share our belief that such careful analysis is well served by discussion and debate of these issues that is at least as frank and vigorous as what we are all accustomed to in the average economics seminar. To that end, we think it would be useful to lay out some of the questions we have about your analysis...
Posted by Mark Thoma on Tuesday, November 28, 2017 at 03:58 PM in Economics, Taxes |
Posted by Mark Thoma on Tuesday, November 28, 2017 at 10:51 AM in Economics, Links |
"will they manage to pull off this giant con job?":
The Biggest Tax Scam in History, by Paul Krugman, NY Times: ...The bill Republican leaders are trying to ram through this week ... is the biggest tax scam in history. It’s such a big scam that it’s not even clear who’s being scammed — middle-class taxpayers, people who care about budget deficits, or both.
One thing is clear, however: One way or another, the bill would hurt most Americans. The only big winners would be the wealthy — especially those who mainly collect income from their assets rather than working for a living...
The core of the bill is a huge redistribution of income from lower- and middle-income families to corporations and business owners. ...
Meanwhile, the bill would partially repeal Obamacare, in a way that would sharply reduce aid to lower-income families and raise the cost of insurance for many in the middle class.
You might wonder how such a thing could possibly pass the Senate. But that’s where the scamming comes in.
While the underlying structure of the bill involves raising taxes on the middle class, the bill also includes a number of temporary tax breaks..., in the first few years most middle-class families would see modest tax cuts.
But the operative word here is “temporary.” All of these tax breaks either dwindle over time or are scheduled to expire at some point; by 2027 the bill is ... a tax increase on the middle class used to pay for tax cuts that mainly benefit the wealthy. ...
So it’s a giant scam. And while the exact nature of the scam may be unclear, ordinary American families would end up being the victims either way.
For suppose those temporary tax breaks did end up becoming permanent, so that the budget deficit soared on a long-term basis. Then what? You know the answer: Republicans would suddenly revert to the pretense that they’re deficit hawks, and demand “entitlement reform” — that is, cuts in Medicare, Medicaid and Social Security... In fact, they’re already talking about those cuts...
So will they manage to pull off this giant con job? The reason they’re rushing this to the Senate floor without a single hearing, without a full assessment from Congress’s own official scorekeepers, is their hope that they can pass the thing before people figure out what they’re up to.
And the question is whether there are enough Republican senators with principles, who believe that policies should not be sold with lies, to stop this bum’s rush.
Posted by Mark Thoma on Tuesday, November 28, 2017 at 10:51 AM in Economics, Politics, Taxes |
Fed Frets About Inflation While Preparing Another Rate Hike, by Tim Duy: The minutes of the Oct. 31-Nov. 1, 2018 FOMC meeting made a bit of a splash with their mixed message. The minutes revealed widespread concern with the weak inflation numbers of the past year. Yet the minutes also showed that committee members were committed to a December rate hike. Damn the torpedoes, full speed ahead! Why the mixed message? Two words: “gradual” and “lags.” ...Continued here (blog and newsletter)...
Posted by Mark Thoma on Tuesday, November 28, 2017 at 10:51 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Saturday, November 25, 2017 at 11:21 AM in Economics, Links |
Posted by Mark Thoma on Tuesday, November 21, 2017 at 11:13 AM in Economics, Links |
"an unprecedented level of dishonesty":
Lies, Incoherence and Rage on Tax Cuts, by Paul Krugman, NY Times: One thing you can count on in 21st-century U.S. politics is that Republicans will lie about taxes. They did it under George W. Bush, they did it under Barack Obama and they’re still doing it under Donald Trump. ...
G.O.P. lies about taxes generally involve two issues: who is hurt or helped by tax changes, and what these changes will do to the budget. ...
So what’s different this time? As in the Bush years, Republicans are claiming to be offering a middle-class tax cut. But where Bush truly was cutting taxes on the middle class, just much less than he was on the wealthy, current Republican plans would raise those taxes on many lower- and middle-income families, even as they go down for the wealthy. ...
How can Republicans ... pretend to be helping the middle class? It depends crucially on a new kind of budget gimmick: Both the House and Senate tax-cut bills do contain some middle-class tax breaks — but only for the first few years. Then they expire. ..., the break would rapidly dwindle and turn into a tax increase by 2024.
The Republican response is to claim that these tax breaks wouldn’t really expire, that Congress would eventually renew them. That’s quite doubtful — and even if true, it means that the tax plans would add much more to the national debt than the G.O.P. admits. Which brings me to the whole budget deficit issue.
Not long ago, leading Republicans claimed to be deeply concerned about budget deficits. Only fools and centrists took the Republicans seriously. Still, the abrupt shift to nonchalance about adding trillions to the debt in order to cut taxes on corporations and the wealthy is causing a bit of whiplash even among cynics. How do they justify the shift?
Well, they don’t seem to have settled on a story. Mnuchin keeps asserting that tax cuts will pay for themselves... Mick Mulvaney, the budget director, cheerfully acknowledges that they’re using gimmicks to pass a bill that permanently cuts taxes on corporations, and not to worry. Whatever works, it seems.
So we’re really looking at an unprecedented level of dishonesty here. ...
The very incoherence of the arguments Republicans are making for their plans shows that it’s not about helping the economy, let alone ordinary families. It really is about making the rich richer, at everyone else’s expense. If this be bull crap, make the most of it.
Posted by Mark Thoma on Tuesday, November 21, 2017 at 11:13 AM
Posted by Mark Thoma on Monday, November 20, 2017 at 12:12 PM in Economics, Links |
Emmanuel Saez & Gabriel Zucman:
Republican tax plan slams workers and job creators in favor of the rich and inherited wealth, by Emmanuel Saez & Gabriel Zucman: The tax plan released by Republicans in Congress and praised by President Donald Trump is a remarkable document in many ways, but most notably in that it achieves the opposite of its stated goal. Presented as a tax cut for workers and job-creating entrepreneurs, it is instead a giant tax cut for the rich and inherited wealth.
Posted by Mark Thoma on Monday, November 20, 2017 at 12:12 PM in Economics, Taxes |
Two from Tim Duy. First:
The Unintended Consequences of a Flatter Yield Curve, by Tim Duy: It was supposed to be easy. When the Federal Reserve started hiking the federal funds rate, longer-term interest rates would rise. After all, they were at very low levels, restrained by a low-term premium. The “Greenspan conundrum” of the past two cycles, when long rates failed to respond in line with higher short rates, couldn’t happen a third time in such circumstances.
But it didn’t work out that way... ...Continued at Bloomberg Prophets...
All Systems Go For A December Rate Hike, by Tim Duy: Incoming data indicate the US economy retains momentum as 2017 draws to a close, clearing the way for the Fed to hike rates in December. Inflation, however, remains on the soft side and continues to make some FOMC members nervous. That said, the consensus looks set to downplay those concerns amid an environment of solid economic growth and declining unemployment rates. I think it will be a challenge for FOMC members to shift gears to steady policy until growth moderates sufficiently to stabilize unemployment rates. ...Continued here...
Posted by Mark Thoma on Monday, November 20, 2017 at 12:12 PM
Peter Lindert at VoxEU:
The rise and future of progressive redistribution, by Peter Lindert: What have governments done to shift national income towards the poor at the expense of those better off? The question deserves a global history, especially in the wake of the disturbing rise in inequality since the 1970s (Atkinson and Morelli 2014). This column’s steps towards a global history of government income redistribution yields the following findings:
- Government budgets have shifted resources progressively, from the rich to the poor, within the last 100 years. The middle ranks are neither favoured nor disfavoured. Before WWI, very little was redistributed through government.
- The shift toward progressivity has not been reversed, contrary to allegations of a rightward shift since the 1970s. Among democratic welfare states, the closest thing to a demonstrable reversal was Sweden’s partial retreat since the 1980s. Globally, the most dramatic swing has been Chile’s record-setting return towards progressivity after the regressivity under Pinochet.
- As a corollary, the rise in inequality since the 1970s owes nothing to a net shift in government redistribution toward the rich, despite the lowering of top tax rates.
- Since the late 1970s, several governments have shown a mission drift away from investing in lower-income children and working-age adults, while concentrating social insurance on the elderly. Japan, the US, and some Mediterranean countries have missed an opportunity for pro-growth income-levelling.
What triggers the new history is the 2016-2017 blossoming of research programmes on fiscal incidence by income class, led by Bengtsson et al. (2016), the Commitment to Equity (CEQ) project (Lustig 2017), the OECD (2011, 2016, forthcoming), and the Distributional National Accounting (DINA) project (Piketty et al. 2016). After combining and extending these, I have added century-long histories for Britain and South American countries (Lindert 2017).
The recent research on government redistribution has concentrated on the 21st century. Combining the latest snapshots from the CEQ and OECD projects yields the group photo of 53 countries around 2013 shown in Figure 1.1 The progressivity of government fiscal redistribution is measured by the gap between the Gini coefficient of inequality in market, or ‘pre-fisc’, income and the Gini coefficient for final, or ‘post-fisc’, income. That gap shows up in Figure 1 as the distance between the 45-degree line and the country’s dot. That gap is smallest for Mexico, and largest for Ireland.
Figure 1 Income inequality and progressivity in 53 countries, c2013
All 53 data-supplying governments redistribute progressively today, placing their dots below the 45-degree line. Probably many other countries do as well, though there may be some who silently redistribute regressively, from households at the bottom to those at the top (North Korea, maybe?). Regions differ. Most Latin American governments do little to offset their countries’ high inequality of market incomes, with Argentina being the clearest exception. In East Asia, Japan and South Korea also do little to redistribute income from rich to poor, but they have much less inequality of market incomes in the first place.
Widespread progressivity is less than 110 years old. Back in 1910, redistribution hardly favoured the poor at all. No country had sizeable direct taxes or transfers, as implied by Figure 2. To underscore how little was given in any country, consider a clear overestimate. Suppose that all direct taxes came from the very top income ranks (untrue), and that all social transfers were given over to the very bottom income ranks (also untrue). The most that could have been transferred from top to bottom is the lesser of these two shares of GDP. In 1910, that was only 2.7% for Britain, and less than 1.5% for every other country. Compare this with today’s (c2013) Gini coefficients. Of the 53 countries in today’s group photo, only Mexico, Turkey, and Korea redistribute as little from rich to poor as did Britain, the progressive leader back in 1910.
Figure 2 Changes in fiscal progressivity since c1910
There have been some retreats from progressivity along the way, but in most cases the lost ground has been regained since. Chile’s famous shift to regressivity after 1973 has been dramatically reversed since the return of democracy after 1989. The Thatcher-Reagan revolutions were also limited and temporary. As suggested by Figure 2, neither of them erased the whole century-long rise of progressivity, and both have since been completely offset by the return of the gradual trend toward progressivity. Among democracies, Sweden is the one clearly quantified case of a country with an enduring retreat from progressivity. Back in 1983, its taxes and transfers shifted enough resources to reduce inequality by 20.5 Gini percentage points. By 2009, this redistribution had retreated to 12.3 percentage points, and no upturn of progressivity is in sight, even though the 2009 redistribution from richer toward poorer still exceeds any achieved by Sweden since the 1970s or earlier. Interestingly, the US has continued to creep toward progressivity, helped by the rising importance of workers’ Earned Income Tax Credit and the increasing use of food stamps.
For other countries, do the latest trends point toward more redistribution or toward less? The results since the 1980s suggest stability and convergence in governments’ redistribution. On the one hand, no global renewal of the 20th century’s global rise of progressivity is foreseeable. The forces that have ushered in that century of redistribution – the rise of average incomes above subsistence, the improvement of governments’ ability to tax, and the spread of political voice for the masses – have reached their foreseeable limits, at least for the rich industrialised democracies. On the other hand, there is also reason to doubt that there has been any widespread retreat toward governments’ redistributing incomes from poor to rich. The OECD’s estimates for about a dozen countries from the mid-1980s to about 2013 show no net change in redistribution, once one has adjusted for cyclical effects.
The lack of any clear retreat to regressivity since the 1970s or 1980s implies an important corollary for the debate over the disturbing rise of overall inequality in this same era. None of this rise is due to a net shift of government budgets towards helping the rich at the expense of the poor. The entire net rise of inequality must have been due to changes in the market economy, such as technological bias, globalisation, and/or trends in human capital.
Scanning the horizon for possible regressive influences on government behaviour in the near future, one should fix one’s gaze in the direction of the treatment of age groups. Since the 1970s, a few countries have exhibited mission drift in their social spending policies, under-investing in lower-income children and those of working age, and relatively overprotecting the elderly. While every country has dramatically reduced poverty among the elderly, Japan, the US, Portugal, and Greece have been particularly remiss in raising the income floor for younger age groups.
Authors’ note: Based on the Fifth Angus Maddison Development Lecture, OECD, 3 October 2017. The Working-paper version is Lindert (2017). The author thanks Orsetta Causa, Marc Fleurbaey, Mikkel Hermansen, Kathy Lindert, Nora Lustig, Eugene Smolensky, Daniel Waldenström, and Jeffrey Williamson for helpful comments on earlier drafts.
Atkinson, T and S Morelli (2014), “The chartbook of economic inequality”, VoxEU.org, 26 March.
Bengtsson, N, B Holmlund and D Waldenström (2016), “Lifetime versus Annual Tax Progressivity: Sweden, 1968–2009”, Scandinavian Journal of Economics 118(4): 619-45.
Lindert, P H (2017), “The Rise and Future of Progressive Redistribution”, Commitment to Equity (CEQ) Institute Working Paper 73, Tulane University.
Lustig, N (2017), “Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries”, CEQ Working Paper No. 54.
OECD (2011), Divided We Stand: Why Inequality Keeps Rising. Paris: OECD Publishing, Chapter 7.
OECD (2016), Downloadable update of the OECD Income Distribution Database.
OECD (forthcoming), Income Redistribution through Taxes and Transfers across OECD Countries. Paris: OECD Publishing. ECO/CPE/WP1 (2017) 21.
Piketty, T, E Saez, and G Zucman (2016), “Distributional National Accounts: Methods and Estimates for the United States”, NBER Working Paper No. 22945 (including its links to online appendices)..
 The two sources have used different measures. For the usual OECD countries, the OECD (2017 and earlier studies cited therein) omitted transfers in kind such as public education and public health, and restricted its estimates to the population of working age. The CEQ, by contrast, included in-kind transfers and the elderly in its measures for Latin America, Asia, the Middle East, and South Africa. The difference in perspectives should not have affected the estimates of net redistribution enough to change any qualitative conclusions here.
 This statement sets aside the countries where communist regimes have broken up. Presumably many of them experienced regressive shifts in income redistribution in the process, though these are hard to quantify.
 OECD (2011, 2016, forthcoming). The forthcoming OECD study will disagree with my interpretation of their data. Yet the seeming decline stems from some biases in presentation. Their study has chosen to set aside the rise in progressivity that their data showed from the mid-1980s to the mid-1990s, instead emphasising a decline in progressivity from the mid-1990s to about 2013. Furthermore, at their chosen starting point in the mid-1990s, the Nordic countries showed high progressivity simply because they were in crisis at the time. The longer comparison of the 1980s and the 2010s is more cyclically neutral, and shows no clear trend.
Posted by Mark Thoma on Monday, November 20, 2017 at 12:11 PM in Economics, Income Distribution |
Posted by Mark Thoma on Friday, November 17, 2017 at 10:29 AM in Economics, Links |
Kurt G. Lunsford of the Federal Reserve Bank of Cleveland:
Productivity Growth and Real Interest Rates in the Long Run: Despite the unemployment rate's return to low levels, inflation-adjusted or "real" interest rates have remained negative. One popular explanation for persistently negative real interest rates is that long-run productivity growth has slowed. I study the long-run relationship between real interest rates and productivity growth from 1914 to 2016 and find a negative correlation between these two variables. Hence, low productivity growth has been historically associated with high real interest rates. Since World War II, the correlation between these variables has been near zero. This suggests that slow long-run productivity growth is not driving real interest rates to be persistently negative. ...
Posted by Mark Thoma on Friday, November 17, 2017 at 10:21 AM in Economics, Productivity |
US Wages: The Short-Term Mystery Resolved: The Great Recession ended more than eight years ago, in June 2009. The US unemployment rate declined slowly after that, but it has now been below 5.0% every month for more than two years, since September 2015. Thus, an ongoing mystery for the US economy is: Why haven't wages started to rise more quickly as the labor market conditions improved? Jay Shambaugh, Ryan Nunn, Patrick Liu, and Greg Nantz provide some factual background to address this question in "Thirteen Facts about Wage Growth," written for the Hamilton Project at the Brookings Institution (September 2017). The second part of the report addresses the question: "How Strong Has Wage Growth Been since the Great Recession?"
For me, one surprising insight from the report is that real wage growth--that is, wage growth adjusted for inflation--has actually not been particularly slow during the most recent upswing. The upper panel of this figure shows real wage growth since the early 1980s. The horizontal lines show the growth of wages after each recession. The real wage growth in the last few years is actually higher. The bottom panel shows nominal wage growth, with inflation included. By that measure, wage growth in recent years is lower than after the last few recessions. Thus, I suspect that one reason behind the perception of slow wage growth is that many people are focused on nominal rather than on real wages.
Government statistics offer a lot of ways of measuring wage growth. The graphs above are wage growth for "real average hourly earnings for production and nonsupervisory workers," which is about 100 million of the 150 million workers.
An alternative and broader approach looks what is called the Employment Cost Index, which is based on a National Compensation Survey of employers. To adjust for inflation, I use the measure of inflation called the Personal Consumption Expenditures price index, which is the inflation just for the personal consumption part of the economy that is presumably most relevant to workers. I also use the version of this index that strips out jumps in energy and food prices. This is the measure of the inflation rate that the Federal Reserve actually focuses on.
Economists using these measures were pointing out a couple of years ago that real wages seemed to be on the rise. The blue line shows the annual change in wages and salaries for all civilian workers, using the ECI, while the redline shows the PCE measure of inflation. The gap between the two is the real gain in wages, which you can see started to emerge in 2015.
Not only has the recovery in US real wages been a bit higher than usual for the last few decades, and especially prominent in the last couple of years, but there is good reason to believe that the wage statistics since the Great Recession may be picking up a change in the composition of the workforce that tends to make wage growth look slower. Shambaugh, Nunn, Liu, and Nantz explain (citations and footnotes omitted):
"In normal times, entrants to full-time employment have lower wages than those exiting, which tends to depress measured wage growth. During the Great Recession this effect diminished substantially when an unusual number of low-wage workers exited full-time employment and few were entering. After the Great Recession ended, the recovering economy began to pull workers back into full-time employment from part-time employment ... and nonemployment, while higher-paid, older workers left the labor force. Wage growth in the middle and later parts of the recovery fell short of the growth experienced by continuously employed workers, reflecting both the retirements of relatively high-wage workers and the reentry of workers with relatively low wages. In 2017 the effect of this shifting composition of employment remains large, at more than 1.5 percentage points. If and when growth in full-time employment slows, we can expect this effect to diminish somewhat, providing a boost to measured wage growth."
The baby boomer generation is hitting retirement and leaving the labor force, as relatively highly-paid workers at the end of their careers. New workers entering the labor force, together with low-skilled workers being drawn back into the labor force, tend to have lower wages and salaries. This makes wage growth look low--but what's happening is in part a shift in types of workers.
One other fact from Shambaugh, Nunn, Liu, and Nantz is that wage growth has been strong at the bottom and the top of the wage distribution, but slower in the middle. This figure splits the wage distribution into five quintiles, and shows the wage growth for production and nonsupervisory workers in each.
Taking these factors together, the "mystery" of why wages haven't recovered more strongly since the end of the Great Recession appears to be resolved. However, a bigger mystery remains. Why have wages and salaries for production and nonsupervisory workers done so poorly not in the last few years, but over the last few decades?
There's a long list of potential reasons: slow productivity growth, rising inequality, dislocations from globalization and new technology, a slowdown in the rate of start-up firms, weakness of unions and collective bargaining, less geographic mobility by workers, and others. These factors have been discussed here before, and will be again, but not today. Shambaugh, Nunn, Liu, and Nantz provide some background figures and discussion of these longer-term factors, too.
Posted by Mark Thoma on Friday, November 17, 2017 at 10:20 AM in Economics, Unemployment |
Economics gets out more often: Using extramural citations to assess economic scholarship, by Josh Angrist, Pierre Azoulay, Glenn Ellison, Ryan Hill, and Susan Lu: The 2017 Nobel in Memorial Prize Economic Sciences, awarded to University of Chicago’s Richard Thaler, has given behavioural economics well-deserved recognition. Thaler and colleagues are fascinated by differences between economists’ benchmark model of rational decision-making and the seemingly irrational decisions that psychologists hope to explain. Behavioural economists work in the space between these two social sciences. This intersection is a recent development: as Camerer (1999) observed, “[E]conomists routinely – and proudly – use models that are grossly inconsistent with findings from psychology.”
Some hold the opinion that the distance between economics and other social sciences reflects the insularity and hubris of economists. Fourcade et al. (2015) argued that academic economics is characterised by a self-serving sense of superiority that reflects the guild-like structure of our discipline (two of the three authors are sociologists). Thaler’s prize reminds us that economics is the only social science for which there is a Nobel. Many economists claim the ear of kings and princes, and most have plenty of outside opportunities to make a buck. Following the Great Recession, this has prompted external critics of the discipline (and some from within, like Zingales 2013) to ask whether our mission of pure scholarship has been corrupted or devalued.
A lonely island?
Our recent paper looking at 'extramural citations' attempts to gauge the scientific standing of academic economics research (Angrist et al. 2017a). We find that the polemical claims that economics is an insular social science are out of date. Economics pays less attention to other social sciences than do political science and sociology – but Figure 1 shows that, since around 1990, this insularity has declined. Economists are now more likely than psychologists to cite other social science disciplines (left-hand panel).
Measured by citations to non-social-science disciplines, economics looks even less insular. ...
Posted by Mark Thoma on Friday, November 17, 2017 at 10:03 AM in Economics |
"The only significant winners would be those making more than $1 million a year.":
Everybody Hates the Trump Tax Plan, by Paul Krugman, NY Times: Looking at the reactions to Republican tax plans, I found myself remembering what people used to say about former Senator Phil Gramm...: “Even his friends don’t like him.”...
The general public strongly disapproves — by a 2-1 majority, according to Quinnipiac, although the majority would be even bigger if people really understood what’s going on. But surely at least C.E.O.s like the plan, right?
Actually, not so much. A few days ago Gary Cohn, Donald Trump’s chief economic adviser, met with a group of top executives. They were asked to raise their hands if lower taxes would lead them to raise capital expenditures; only a handful did. “Why aren’t the other hands up?” asked Cohn, plaintively.
The answer is that C.E.O.s ... know that tax rates aren’t that important a factor in investment decisions. ...Most serious economic analyses agree..: Corporate tax cuts wouldn’t actually do much to raise investment. They would, however, explode the budget deficit.
So in an attempt to limit that deficit blowout, Senate Republicans are proposing significant tax increases on working families..., taxes would rise on average for every group with incomes under $75,000 a year... The only significant winners would be those making more than $1 million a year. Populism!
Oh, and this doesn’t even take account of the health care sabotage... By repealing the mandate ... the plan would ... cause 13 million to lose coverage; that loss of coverage, and the associated government subsidies, is why mandate repeal saves money that can be given to corporations. But the move would also drive up premiums... So that’s an additional, hidden indirect tax on the middle class.
Nor does it take account of what would inevitably come next: tax-cut-induced deficits would, by law, trigger cuts in Medicare, and this would just be the start of a G.O.P. assault on programs like disability insurance...
All of which raises the question, why are Republicans even trying to do this? It’s bad policy and bad politics, and the politics will get worse as voters learn more about the facts. Well, last week one G.O.P. congressman, Chris Collins of New York, gave the game away: “My donors are basically saying get it done or don’t ever call me again.”
So we’re talking about government of the people, not by the people, but by wealthy donors, for wealthy donors. Everyone else hates this plan — and they should.
Posted by Mark Thoma on Friday, November 17, 2017 at 09:56 AM in Economics, Politics, Taxes |
Posted by Mark Thoma on Wednesday, November 15, 2017 at 10:41 AM in Economics, Links |
Should We Reject the Natural Rate Hypothesis?, by Olivier Blanchard, PIIE: Fifty years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run tradeoff between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. Blanchard reviews the arguments and the macro and micro evidence against each and concludes that, in each case, the evidence is suggestive but not conclusive. Policymakers should keep the natural rate hypothesis as their null hypothesis but keep an open mind and put some weight on the alternatives. [paper]
Posted by Mark Thoma on Wednesday, November 15, 2017 at 10:22 AM in Academic Papers, Economics, Macroeconomics |
"This isn’t just ordinary class warfare; it’s class warfare aimed at perpetuating inequality into the next generation.":
Republican Class Warfare: The Next Generation, by Paul Krugman: The other day, Mitch McConnell, the Senate majority leader, admitted to The New York Times that he “misspoke” when he declared that his party’s tax plan wouldn’t raise taxes on any middle-class families. But he misspoke when he said “misspoke”: The proper term is “lied.” ...
We’re still waiting for detailed analysis of the Senate bill, but the House bill doesn’t just raise taxes on many middle-class families: It selectively raises taxes on families with children. In fact, half — half! — of families with children will see a tax hike once the bill is fully phased in.
Suppose that a child from a working-class family decides ... to attend college, probably taking out a loan to help pay tuition. Well, guess what: Under the House bill, that interest would no longer be deductible, substantially raising the cost of college.
What if you’re working your way through school and your employer contributes toward your education expenses? The House bill would make that contribution taxable income.
What if your parent is a university employee, and you get reduced tuition as a result? That tuition break becomes taxable income. So would tuition breaks for graduate students who work as teaching or research assistants.
So what we’re looking at here are a variety of measures that will close off opportunities for children who weren’t clever enough to choose wealthy parents.
Meanwhile, funding for the Children’s Health Insurance Program, which covers more than eight million children, expired a month and a half ago — and so far, Republicans have made no serious effort to restore it. This is surely the shape of things to come: If tax cuts pass, and the deficit explodes, the G.O.P. will suddenly decide that deficits matter again and will demand cuts in social programs, many of which benefit lower-income children.
So this isn’t just ordinary class warfare; it’s class warfare aimed at perpetuating inequality into the next generation. Taken together, the elements of both the House and the Senate bills amount to a more or less systematic attempt to lavish benefits on the children of the ultra-wealthy while making it harder for less fortunate young people to achieve upward social mobility.
Or to put it differently, the tax legislation Republicans are trying to ram through Congress with indecent haste, without hearings or time for any kind of serious study, looks an awful lot like an attempt not simply to reinforce plutocracy, but to entrench a hereditary plutocracy.
Posted by Mark Thoma on Wednesday, November 15, 2017 at 10:22 AM in Economics, Politics, Taxes |
Posted by Mark Thoma on Tuesday, November 14, 2017 at 10:34 AM in Economics, Links |
"A major contributor to low inflation is the health-care services sector":
FRBSF FedViews: Adam Shapiro, research advisor at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of November 9, 2017.
Despite disruptions from the recent hurricanes, real gross domestic product (GDP) has continued to grow at a moderate pace. After a strong second quarter, real GDP grew at an annual rate of 3% in the third quarter, according to the “advance” estimate by the Bureau of Economic Analysis. We forecast that GDP will grow in the fourth quarter at an annual rate of 2.6% and average 2.5% for 2017. As monetary policy continues to normalize over the next two to three years, we expect growth to gradually fall back to our long-trend growth estimate of 1.5%.
The recent fires in Northern California were the most devastating in the state’s history, causing billions of dollars in property damage, thousands of displaced residents, and tragic loss of life. While the full effect of the fires on the local economy is still being determined, the economic impact on the entire United States is likely to be modest as the affected areas are not sizable business or population centers.
The U.S. economy added 261,000 jobs in October, reflecting not only individuals returning to work who had been kept home by the hurricanes, but also the strong labor market. Job gains have averaged close to 160,000 over the past six months, well above the amount needed to absorb the flow of new workers into the labor force.
The unemployment rate stands at 4.1% as of October. We expect the unemployment rate to decline below 4.0% by the middle of 2018 as the economy continues to strengthen. Monetary policy accommodation will ease over the longer run, and we expect the unemployment rate to gradually return back to our estimate of the natural rate of 4.8%.
The yield curve continues to flatten as short-term rates rise while longer-term rates remain relatively steady. At the November meeting, the Federal Open Market Committee (FOMC) kept the target range for the federal funds rate unchanged at 1 to 1.25% and announced it is proceeding with the balance sheet normalization process initiated in October.
Inflation continues to remain below the FOMC’s target of 2%. The personal consumption expenditures (PCE) price index rose 1.6% over the past 12 months, while the core PCE index, which removes volatile food and energy prices, rose 1.3%. As the labor market continues to tighten, we expect inflation to gradually reach the FOMC’s target of 2% by 2019.
Inflation fluctuates with the overall economy but also in response to factors that are more industry specific. The degree of price sensitivity to overall economic conditions and other factors varies across sectors. Prices in some sectors, such as housing, restaurants, and recreation services and goods, are relatively more sensitive to overall economic conditions, while prices in other sectors, such as health-care, financial, and communications services, are relatively more sensitive to industry-specific factors.
The inflation rate for prices in sectors that tend to be sensitive to the overall state of the economy have moved back up to pre-recession levels, in line with the improvement in economic conditions. By contrast, the inflation rate has fallen for sectors that tend to be more sensitive to industry-specific factors and is currently holding down inflation.
A major contributor to low inflation is the health-care services sector, which currently makes up about one-fifth of core personal consumption expenditures and tends to be relatively insensitive to economy-wide conditions. Health-care services inflation has declined steadily, falling from an average above 3.0% in the mid-2000s to close to 1.0% over the past five years.
The decline in health-care services inflation is mainly attributable to ongoing mandated cuts to Medicare payment growth, which also tend to affect payments in the private health-care market. Medicare payments to hospitals, for example, have been flat for the past five years. Some of the payment growth cuts are permanent, which are likely to cause some continued drag on inflation in the future, despite a strengthening economy.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.
Posted by Mark Thoma on Monday, November 13, 2017 at 03:45 PM in Economics |
Taking Stock, by Tim Duy: At some point every year I sense a need to reset and clarify my baseline views on the economy and monetary policy. This is that time. ...Continued here...
Posted by Mark Thoma on Monday, November 13, 2017 at 03:34 PM in Economics, Monetary Policy |
Did the Rise of China Help or Harm the US? Let's not forget Basic Macro: This is a question which was posed to me after I presented last week at the Federal Reserve Board in DC. Presenting there was an honor for me, and I got a lot of sharp feedback. It's also getting to the point where I need to start thinking about my upcoming AEA presentation alongside David Autor and Peter Schott, two titans in this field who both deserve a lot of credit for helping to bring careful identification to empirical international trade, and for challenging dogma. After all, before 2011, as far as I know the cause of the "Surprisingly Swift" decline in US manufacturing employment had not been written about in any academic papers. This was despite the fact that the collapse was mostly complete by 2004, and was intuitive to many since it coincided with a large structural trade deficit. (Try to explain that one with your productivity boom and slow demand growth, Robert Lawrence...)
On one hand, there is now mounting evidence that the rise of Chinese manufacturing harmed US sectors which compete with China. This probably also hurt some individual communities and people pretty badly, and might also have triggered an out-migration in those communities. On the other hand, typically the Fed offsets a shock to one set of industries with lower interest rates helping others, while consumers everywhere have benefited from cheaper Chinese goods. Which of these is larger? I can't say I'm sure, but of these shocks mentioned so far, I would probably give a slight edge to the benefit of lower prices and varieties. However, I suspect, even more importantly, Chinese firms have also been innovating, more than they would have absent trade, which means the dynamic gains in the long-run have the potential to be larger than any of these static gains/losses you might try to estimate courageously with a model.
Many (free!) trade economists use the above logic (perhaps minus the dynamic part), and conclude that no policies are needed to help US manufacturing right now. However, I think this view misses 4 other inter-related points, and in addition does not sound to me like a winning policy strategy for the Democrats in 2020. And a losing strategy here means more Trumpian protectionism.
Posted by Mark Thoma on Monday, November 13, 2017 at 12:28 PM in Economics, International Trade |
"The end result of this tax bill would be to leave most working Americans, even those who wouldn’t face direct tax increases, worse off, all for the benefit of a tiny minority":
Trump and Ryan Versus the Little People, by Paul Krugman, NY Times: According to news reports, Donald Trump wanted the House Republican tax “reform” bill to be called the Cut Cut Cut Act. Alas, he didn’t get his wish, and it was instead given a boring name nobody can remember. But there’s still time to change it! So let me propose, as one reader suggested, that it be renamed the Leona Helmsley Act, after the New York hotelier convicted of tax evasion, who famously declared that “only the little people pay taxes.”
That, after all, is the main thrust of the bill. It hugely favors the wealthy over the middle class, which is pretty much always true of Republican proposals. But it’s not just about favoring high incomes: It also systematically favors people who live off their assets, especially inherited wealth, over the little people — that is, poor shlubs who actually have to work for a living. ...
So when Gary Cohn, Trump’s top economic adviser, says that the bill’s goal is “to deliver middle-class tax cuts to the hard-working families in this country,” he’s claiming that up is down and black is white. This bill does little or nothing for the middle class, and even among the affluent it’s biased against those who work hard in favor of the idle rich.
Also let’s not forget that tax increases on working Americans are only part of the story. This bill would also, according to the Congressional Budget Office, add $1.7 trillion to the national debt over the next decade. You know what that means: If this bill or anything like it passes, Republicans will immediately revert to their previous pretense of being deficit hawks and start demanding spending cuts.
And since federal spending is dominated by programs — Social Security, Medicare and Medicaid — that benefit the middle and working classes, the end result of this tax bill would be to leave most working Americans, even those who wouldn’t face direct tax increases, worse off, all for the benefit of a tiny minority, especially those who haven’t even worked for their wealth.
You might wonder how Republicans imagine that they can get away with this. But anyone who has paid attention to U.S. politics knows the answer. First, they will lie, unashamedly, about what their bill actually does. Second, they will try to distract working-class voters by stoking racial animosity. That didn’t work too well in Tuesday’s elections, but they’ll keep on trying.
Posted by Mark Thoma on Friday, November 10, 2017 at 09:11 AM in Economics, Politics, Taxes |
Posted by Mark Thoma on Friday, November 10, 2017 at 09:11 AM in Economics, Links |
Posted by Mark Thoma on Wednesday, November 8, 2017 at 01:39 PM in Economics, Macroeconomics, Video |
Trade Policy and the Macroeconomy, by Barry Eichengreen, IMF: It’s an honor and privilege to have been asked to deliver the Mundell-Fleming Lecture. It’s also a bit intimidating. I won’t read off the entire list of luminaries who have given this lecture. But they include our master of ceremonies and my Berkeley colleague Maury Obstfeld. They include Stanley Fischer, my boss when I worked at the IMF. And they include my oldest and closest childhood friend from the age of three. (If you don’t know who that is, you get to guess.)
My topic today is trade policy and the macroeconomy. I chose this as my topic for several reasons.
The first is, of course, Donald Trump. President Trump has controversially argued that tariffs are good for economic growth. This makes now an important time to reconsider the question.
A second reason is: Paul Ryan, or more precisely the idea of a border-adjustment tax...
Third, the framework most widely used to analyze these issues is, appropriately for this venue, the Mundell-Fleming model. ...
Fourth, the literature on this subject is importantly informed by research here at the IMF. ...
Fifth, these are issues on which historical evidence has been used to shed light. ...
Sixth and finally (perhaps I should say “sixth and self-indulgently”), this is where I came in. My Ph.D. dissertation was on the macroeconomic effects of trade restrictions...
My remarks are in three parts. First, I will consider the evidence on tariffs and growth from an historical vantage point. Next I will review what we know about trade policy and macroeconomic fluctuations. Although the first part is about growth and the second part is about fluctuations, similar issues arise in the two contexts. In concluding, I will then return to the current policy debate.
I will argue that both theory and empirics in this area have ambiguous implications. Even more than other areas of economics perhaps, conclusions are sensitive to assumptions. Theoretical results are fragile, and empirical findings are context specific. Given this uncertainty, I will argue that the best guideline for practitioners tempted to deploy trade policy for macroeconomic purposes remains Hippocrates’ dictum, “first, do no harm.” ...continue... [conference papers]
Posted by Mark Thoma on Wednesday, November 8, 2017 at 01:30 PM in Economics, International Trade, Politics |
Posted by Mark Thoma on Wednesday, November 8, 2017 at 10:25 AM in Economics, Links |
Taking a Crack at Neoliberalism, by Dani Rodrik: ..my new piece “Rescuing Economics from Neoliberalism,” just out in the Boston Review. ... Here is the core of it:
That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that center-left politicians—Democrats in the United States, Socialists and Social Democrats in Europe—enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatization, financial liberalization, and individual enterprise? Much of our contemporary policy discussion remains infused with norms and principles supposedly grounded in homo economicus.
But the looseness of the term neoliberalism also means that criticism of it often misses the mark. There is nothing wrong with markets, private entrepreneurship, or incentives—when deployed appropriately. Their creative use lies behind the most significant economic achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of neoliberalism’s useful ideas.
The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions. A proper understanding of the economics that lies behind neoliberalism would allow us to identify—and to reject—ideology when it masquerades as economic science. Most importantly it would help us develop the institutional imagination we badly need to redesign capitalism for the twenty-first century.
For the full piece, go here.
Posted by Mark Thoma on Wednesday, November 8, 2017 at 10:25 AM in Economics |
Posted by Mark Thoma on Tuesday, November 7, 2017 at 10:18 AM in Economics, Links |
"And the cynic would be right":
Trump, Gillespie and the Same Old Party, by Paul Krugman, NY Times: Since last year’s presidential election a number of establishment Republicans have very publicly wrung their hands over what has happened to their party. ...
But how different is Trump, really? ...
What, after all, does the modern ... Republican Party stand for? A cynic might say that it has basically served the interests of the economic elite while winning votes from the white working class with racial dog whistles. And the cynic would be right.
And if that’s what modern Republicanism is really about, how much has changed in the era of Trump? Consider two current news stories: the House Republican tax plan and the campaign that Ed Gillespie, a consummate Republican insider, has been running for governor of Virginia.
On the tax plan...
True, the plan contains a few initial tax breaks for middle-income families, but these erode or disappear over time. According to the nonpartisan Joint Committee on Taxation, by the time the law would be fully phased in, there would be huge income gains for millionaires — even bigger if you take repeal of the estate tax into account — with minimal benefits for a great majority of the population. In fact, tens of millions of middle- and lower-income families would end up facing tax increases, which is pretty amazing for a bill that would add $1.5 trillion to the deficit. ...
In short, Trumpist tax policy is as elitist if not more elitist and anti-populist than the policies of previous Republican administrations. Same old, same old.
But what about Trump’s more or less naked white nationalism? Isn’t that a departure? Well, how different is it from Ronald Reagan’s talk about welfare queens driving Cadillacs, or the elder Bush’s Willie Horton ad? And in any case, we don’t have to argue about the past: Just look at how Ed Gillespie has campaigned in Virginia over the past few months. ... As The Washington Post put it, “His campaign’s thrust has not been just a dog whistle to the intolerant, racially resentful parts of the Republican base; it’s been a mating call.”
So has Gillespie faced strong criticism from establishment Republicans for waging such a gutter campaign? No...
Oh, and if you’re in Virginia, reading this, and haven’t yet voted, please do. This is a hugely consequential election, and it will be a shame — indeed, a tragedy — if its outcome is determined by people who couldn’t be bothered to get to the polls.
Posted by Mark Thoma on Tuesday, November 7, 2017 at 09:55 AM in Economics, Politics |
Fed Will Keep the Rate Hikes Coming, by Tim Duy: Lots of news from last week, most of which supported the Fed’s current anticipated rate path of one 25bp hike in December followed by three more in 2018. The only potential obstacle on that path is the persistent weakness of inflation. But the ongoing decline in the unemployment rate, along with the promise of further declines in the months ahead, will dominate lingering concerns at the Fed regarding the inflation numbers. ...Continued as newsletter...
Posted by Mark Thoma on Monday, November 6, 2017 at 09:44 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Monday, November 6, 2017 at 09:40 AM in Economics, Links |
Posted by Mark Thoma on Friday, November 3, 2017 at 10:01 AM in Economics, Links |
"The big question should be, why do any of this?":
Donald Trump, Paul Ryan and the Con Man Caucus, by Paul Krugman, NY Times: ...On Thursday, House Republicans unveiled a tax “reform” bill with the same good order and careful deliberation with which they unveiled their various attempts to repeal Obamacare. That is, after having had years to prepare, the G.O.P. waited until the last minute to throw something together, without any hearings or serious analysis.
Budget wonks are frantically going through the legislative language, trying to figure out what it means and what it would do — but they can take some comfort in the fact that the bill’s authors are almost equally in the dark.
O.K., some things are clear: The bill would give huge tax breaks to corporations and the wealthy, especially wealthy heirs, while opening vast new opportunities for tax avoidance. You won’t go far wrong if you think of the big tax cuts in the law as having been custom designed to benefit the Trump family.
But these big tax cuts would blow a multitrillion-dollar hole in the budget, so Republicans have been scrambling to find “pay-fors” that limit the addition to the deficit. ...
Since the point of these measures is to offset tax cuts for the rich, they will, more or less by definition, end up raising taxes on large numbers of middle-class families. ...
The big question should be, why do any of this? Ryan used to claim that his plans were about reducing the budget deficit, but he has now given up that pretense.
And why should tax cuts even be on the table? We have budget deficits, not surpluses, and lots of unmet needs for future spending. U.S. taxes are low, not high, compared with other wealthy countries. Predictions that tax cuts will lead to rapid economic growth have been wrong time and again. And by large margins, voters want taxes on corporations and the wealthy to go up, not down.
The ruling theory among Republicans seems to be that going into the midterm elections they need a “win”... I guess this might be right, although it’s a theory that reveals extraordinary contempt for voters, who are supposed to be impressed by the G.O.P.’s ability to ram through policies that only benefit a tiny elite.
How ever the politics turn out, this is remarkably terrible policy, devised via a remarkably terrible process. Most Americans realize that Donald Trump is a very bad president; they need to realize that his party’s congressional leadership is pretty awful, too.
Posted by Mark Thoma on Friday, November 3, 2017 at 10:01 AM in Economics, Politics, Taxes |
Economy Not Likely Easy For Next Fed Chair, by Tim Duy: The U.S. appears set to enter a more risky phase of the business cycle as the Federal Reserve attempts to glide the economy into a so-called soft-landing. For President Donald Trump’s likely nominee as chair, Jerome Powell, this means tightening policy enough to settle the economy into full employment, but not so much that it trips into recession.
Navigating this transition will be challenging for investors and the Fed alike. Market participants should be wary of assuming that a slowing economy means a recession is near. At the same time, central bankers need to be wary that they don’t slow the economy too much and set the stage for the next recession. Altogether, this means the relative calm of the past year is likely to end soon. ...[Continued at Bloomberg]...
Posted by Mark Thoma on Friday, November 3, 2017 at 10:01 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Thursday, November 2, 2017 at 10:52 AM in Economics, Links |
I have a new article on the past, present, and future of Federal Reserve Independence (it was written during the summer):
Federal Reserve Independence: The Never-Ending Story, by Mark Thoma: In December 1965, President Lyndon Johnson met with Federal Reserve Chairman William McChesney Martin at the president’s surprisingly modest ranch in the Texas Hill Country. Johnson was upset with Martin for tightening credit despite Johnson’s expressed preference for more accommodative policy. At one point, the president began pushing the Fed chairman around the room, haranguing him with one of his patented hard sells, “Martin, my boys are dying in Vietnam, and you won’t print the money I need.”
Martin resisted Johnson at the time, but eventually moved policy in the direction the White House demanded. Looking back years later, Martin, who was dubbed the “happy Puritan” by one journalist, lamented, “To my everlasting shame, I finally gave in to him.”
The idea that monetary policy should be made independent of political influence is widely (though hardly completely) accepted today. As former Fed Chairman Ben Bernanke (2006-14) noted, “Careful empirical studies support the view that more-independent central banks tend to deliver better inflation outcomes than less-independent central banks, without compromising economic growth.” But as the LBJ anecdote suggests, the Fed did not always enjoy the degree of independence it has today. Before the era that began with Paul Volcker (1979-87), political influence on monetary policy was the rule rather than the exception.
The independence of today’s Fed is supported by its unusual institutional framework. But the primary bulwark against interference is psychological, driven less by laws and regulations and more by the convictions of key players that the economy is better off with a central bank that can exercise broad discretion in monetary policy. Hence a president inclined to dismiss Bernanke’s “careful empirical studies” who is abetted by a Congress unwilling to resist meddling could reverse the four-decade precedent. ...[continue]...
Posted by Mark Thoma on Wednesday, November 1, 2017 at 10:15 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Wednesday, November 1, 2017 at 10:14 AM in Economics, Links |