Monday, February 26, 2018

A great EFG

On Friday, I went to the NBER EFG (Economic Fluctuations and Growth) meeting at the SF Fed. Program and papers here.  The papers were great, the discussions were great, the comments were great, even the food was good. (You know you're in California when the conference snack is avocado toast.)

The papers:

1) Fatih Guvenen, Gueorgui Kambourov, Burhanettin Kuruscu, Sergio Ocampo-Diaz, Daphne Chen, "Use It Or Lose It: Efficiency Gains from Wealth Taxation"  Discussant: Roger H. Gordon.

If everyone earns 4% return on their investments, a 50% rate of return tax (combining corporate income and personal taxes) is the same thing as a 2% wealth tax.   Everyone gets a 2% after tax return on their investments.

But what if some people -- Mike, in the example, -- are skillful entrepreneurs and can earn 20% rate of return, while and others -- Fredo -- earn 0% returns. Now a 50% rate of return tax lowers Mike's return to 10% but has no effect on Fredo. If the government raises the same amount of money -- 10 cents -- from a 0.10/2.20 = 4.5% wealth tax,   Mike earns a (1-0.045) x 1.20 -1 = 14.6% rate of return, and Fredo earns a - 4.5% rate of return. The incentive to be Mike rises, and to be Fredo declines.

The paper has a model with all sorts of useful bells and whistles -- you want these to do tax policy -- building on this intuition. The model fits all sorts of facts including the wealth distribution. The wealth tax ends up helping workers too, because wages rise.
In the simulated model calibrated to the U.S. data, a revenue-neutral tax reform that replaces capital income tax with a wealth tax raises welfare by about 8% in consumption-equivalent terms. ... optimal wealth taxes result in more even consumption and leisure distributions (despite the wealth distribution becoming more dispersed)...wealth taxes can yield both efficiency and distributional gains
Much discussion, centering on whether skill really is tied to returns.

2) Matteo Maggiori, Brent Neiman, Jesse Schreger, "International Currencies and Capital Allocation"
Discussant: Harald Uhlig (funniest discussion award)

Mutual funds have a strong home currency bias, which completely drives out home bias.  These investors like to hold bonds in their own currency, but not necessarily issued by companies in their home country.  If you want to sell bonds to Canadians -- even Canadian mutual funds -- sell them in Canadian dollars. There is one exception: the dollar. When funds branch out to other currencies, they start with dollars. Likewise, small companies primarily raise money in their own currency. When they branch out, they start with dollars.

3) Katarína Borovičková, Robert Shimer, "High Wage Workers Work for High Wage Firms" Discussant: Isaac Sorkin

A clever measure of correlation, showing that, as the title says, high wage workers work for companies that pay high average wages, and also low wage workers work for companies that pay low wages. This seems obvious, but it has not been in the data. The previous approach to this question by Abowd, Kramarz and Margolis (1999) found no correlation. A big discussion about correlation vs the AKM regression estimate. It turns out the definition of correlation is very subtle, and depends on the kind of search model you have in mind.

Ellen McGratten asked a sharp question: Wait, if a firm outsources its janitors, does this not spike? Really we are learning about the boundaries of the firm. Answer yes, and really we want to know whether high wage people work with other high wage people. More discussion about what the fact means about joint production and the sorting and matching process.

4) Marcus Hagedorn, Iourii Manovskii, Kurt Mitman, "The Fiscal Multiplier" Discussant: Adrien Auclert

This paper is about repairing the ridiculously huge estimates of fiscal multipliers in New-Keyensian models at the zero bound. There is a lot going on including heterogenous agents with financing constraints, which I can't review. 

Here's one thing I learned from it -- naturally related to the issues I have thought about in this context in "the new-Keynesian liquidity trap" here. Building on an earlier paper by Hagedorn, they posit a money-like demand for government debt. Thus they have nominal debt/price level = function of something real. Like the fiscal theory, in which nominal debt/price level = expected present value of real surpluses, and like MV=PY, this can determine the price level, and thus pick equilibria. They pick equilibria with limited inflation jumps, which like the fiscal theory serves to limit the size of the usual huge multipliers.  The money-like nature of government bonds, whether from a backing theory like the fiscal theory, or from this mechanism similar to money demand, is a common thread to many resolutions of new-Keynesian paradoxes. And it offers a much more conservative way forward than fundamental surgery, such as abandoning rational expectations. 

5) Carlos Garriga, Aaron Hedlund, "Housing Finance, Boom-Bust Episodes, and Macroeconomic Fragility" Discussant: Guido Lorenzoni

I'm really impressed with the detail of modern housing models like this. Rent vs. own decisions, supply of rental housing, search and transactions costs to change housing, incomplete markets, realistic mortgages, mortgage default, adjustment costs, nonseparable housing and nonhousing consumption, refinancing, cash-out refinancings,  and I probably missed half of it. Solve, match a bunch of facts, analyze a crisis and policy alternatives. 

Different states subsidize college education to different degrees. Does having a great state university pay off, in that you get a better workforce? Or do your graduates just all leave to New York and work for investment banks, or to Palo Alto to work for Google? Apparently not. 


  1. On 1, what about the impact of inflation in a world with taxes on returns? If there's 2% inflation per year and a 50% tax on returns, then wouldn't that be at least as large as a 1% inflation tax provided a person has a positive real return?

  2. Good summary. Thanks.
    "The model fists" should be "The model fits"

  3. Thrilled to see a wealth-tax paper in the list.

  4. Avocado toast? What, was it all millennials?

    1. Have you seen the snacks that get rolled out at seemingly most academic conferences these days? Some avocado toast seems like a refreshing alternative to burnt coffee and cheap granola bars :-)

  5. Would a wealth tax deter the cycles of rising asset prices followed by collapsing asset prices followed by rising asset prices, etc.? Wealth creation has become a function of rising asset prices (as opposed to returns on capital investment), giving owners of capital and regulators an incentive to promote rising asset prices (over stable asset prices and higher rates of return on capital investments).

  6. I wrote a post saying that the wealth tax is a good theory but utterly impractical because valuation is such an iffy business, asset prices are volatile, and it is really hard to enforce. A particular problem is that in market crashes, the tax does not disappear. Owners would have to liquidate permanent capital to pay the tax if they got upside down. It would therefore harm saving, investing, and risk taking. But like half of my posts here it disappeared.

    1. You are right. The estate tax and real estate property tax already have huge amounts of this problem. There is a reason many wealthy Americans hold real estate or hard to value private businesses.


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