What's in the reconciliation bill? A conversation with Casey Mulligan.

 A podcast discussion with Casey Mulligan. What's in the reconciliation bill? How will it work? 

Link to the podcast page, with lots of other formats. 

Yesterday Casey tweeted that he had read the entire 2,400 page bill. Casey does this sort of thing, as explained in his book "Your'e hired." I have been trying to figure out what's in it for a while. The media coverage is basically absent. (See this great Marginal Revolution post and Bloomberg column (gated, sadly) by Tyler Cowen.) I tried downloading the actual bill too, but promptly fell asleep. (Casey has some good hints on how to read it.) 

But here we are, about to embark on a huge set of new federal programs, really larger than anything since the Johnson Administration, and there is essentially no description of what they are, no debate on how they will work, and especially (my hobby horse) what incentives and disincentives they provide. Many of the previous welfare-state programs were disastrous for the supposed beneficiaries. How are we going to avoid that again? At most we talk about top line numbers. I'm a debt hawk, but if we could heal the planet, end all inequity, bring full social racial and gender justice, wipe out poverty, give every American a life of dignity, prosperity, and opportunity for a mere $3.5 trillion, I'm in. Double it. The real question is whether any of this will happen. 

Well, Casey read the bill and knows what's in it! Tune in to find out.. 

PS, I hope to get the podcast going more regularly this fall,

Update: 

A summary and review from David Henderson. 

Casey writes a detailed blog post on BBB disincentives. 

Inequality/opportunity survey

I was interested by a simple survey run by the Archbridge Institute on attitudes regarding inequality vs. opportunity, and  equality vs. equity issues. 

Reducing inequality, "there should be no Billionaires" is only the top issue for a quarter of people. Equality of opportunity, and help for those on the bottom garner about 60%. The demographic consistency is interesting. Yes, the young and the credentialed skew more left -- our education system is passing on its values. But not nearly as much as you'd think. Minorities are not much different than the rest. Redistributionist opinions are a bit of a luxury belief, but again not as much as you'd think. 

The meaning of "equality," the founding concept of our nation (Jefferson) is even more stark. Equity -- end up in the same place -- scores dismally. Even starting in the same place scores dismally. Extra help for the disadvantaged, something I would choose as #2 goal, scores dismally. "Equality before the law and people have a fair chance to pursue opportunity regardless of where they started" is the overwhelming winner. Again, the demographic consistency is surprising relative to the Standard Narrative. And heart-warming.

What is the best way to get ahead economically? Employment, college degree, and family and social support completely drown out even the fable of "well-designed" government assistance programs. 

The report goes on like this, with a nice executive summary. 

Even around Hoover, I hear passed along a conventional wisdom: Income inequality is a Huge Problem. It will lead to social and political unrest. "We" must do something about it or our country will fall apart. 

Not, apparently, according to vast quantities of survey respondents. Opportunity remains a problem in the US, and if I were to design something to appeal to these survey respondents, that's the word I would be using. 

Garicano's conversations with economists

Luis Garicano has just posted a very interesting free e-book, "Capitalism after covid: Conversations with 21 economists." I was honored to be one of his interviewees, video here. Luis has a VoxEU column summarizing conversations, and twitter thread if you like reading such things. Luis is a great interviewer. 

This is not an endorsement of all the ideas! Luis found a wide spectrum of ideas, and I think that is the strong thing about the project. You can see how really smart people, on top of the latest academic research, come to still widely different conclusions about the current state of affairs and directions we should go. Though Luis is a pretty free-market Chicago guy, he did not impose that view which I find admirable. 

In particular, referring to the VoxEU column, I would take issue with 

The bulk of the shock was absorbed by the public sector budget. 

That the world could produce such a massive, coherent, and rapid economic response to the pandemic had a lot to do with the consensus that quickly emerged among economists on how best to respond to the unprecedented shock...

Unlike during the Great Financial Crisis, when there was an often-acrimonious debate between economists arguing for austerity and those arguing for stimulus, the priorities were clear: 

Central banks should be concerned with maintaining financial stability and providing limitless liquidity to debt markets. 

Governments should prioritise the maintenance of household incomes through generous support for workers’ incomes, albeit with different approaches in the US and Europe: significant expansions of unemployment insurance in the US and the general deployment of ‘Kurzarbeit’ in Europe.  

Governments should provide ample liquidity facilities to firms, making it possible for them to emerge as undamaged as possible by the lockdowns. 

Finally, large, debt-financed public investments would be needed to support the recovery. 

I  disagree loudly with just about all of this, and thereby especially enshrining these expedients as "consensus" ready to be deployed at even larger scale in the next pandemic. 

If there is consensus on anything it is that our governments completely bungled the public health aspect of this crisis, with the exception of a few countries like South Korea and Taiwan. The FDA and CDC are particularly at fault for blocking testing and vaccines. 

Why did covid produce an unprecedented economic collapse, while the 1958 and 1918 flus produced nary a blip of GDP? Because of the completely overdone business lockdowns. The economic shock was caused by the government not by the virus. What good did it do to run up government debts by trillions in order to send checks to retirees and people who were happily working? I'm sure everyone likes more money, but that has nothing to do with covid. Apparently half of expanded unemployment was stolen (I even got notice someone trying to file in my name). " large, debt-financed public investments would be needed to support the recovery." Consensus on that please? Not from here. The recovery is doing fine on its own, and adding more to the abstract sculpture taking place in the Central Valley under the auspices of a high speed train from Bakersfield to Modesto is not going to help. And why is nobody even thinking moral hazard? We now have enshrined a system in which nobody may lose money in a recession, asset prices will be propped up by central banks. Why not lever to the hilt? Why keep some cash around, as there will be no more buying opportunities? 

But that Luis interviews such good and prominent economists and finds support for this sort of boondoggle policy is interesting. 

Tackling inequality. Over the last few decades, inequality in household income and wealth has increased dramatically in the West.  

This is simply not a fact. (See Grumpy coverage of Austen and Spinter here.) Inequality in pre-tax pre-transfer income has increased. Who cares about that? Inequality of mark-to-market wealth has increased as founders stock values have risen. Who cares about that? 

Several interviewees explain the progress economists are making in tackling these problems. Atif Mian argues that to reduce inequality, policies must focus on achieving more equitable growth through a significant increase in public investment, and second, on addressing some of the legacies of the imbalances, particularly through an increase in the progressivity of taxation. 

Well, if you are a grumpy follower you will find there a well articulated points to disagree with. The US already has the most progressive tax system in the world BTW. And back to more high speed trains to nowhere.. 

Stefanie Stantcheva discusses how to design better taxes and how to improve people´s understanding of those issues. Oriana Bandiera highlights a significant shift in our understanding of poverty that implies that social assistance programmes, that traditionally were designed to subsidise consumption, should shift to being geared towards investment. Esteban Rossi-Hansberg discusses the concentration of talent and economic activity in cities and the extent to which the ‘Zoom revolution’ will upend this concentration and wonders whether that would be desirable, given the potential loss of positive externalities of physical proximity.

But here are some good-sounding innovative ideas, to give you a sense that economists don't just line up on typical left-right spectrum. I need to read those. 

Containing the new leviathan.  It is quite likely that, after the unprecedented policy response to the pandemic, governments will grow permanently larger, leading to an increase in interventionism and, potentially, crony capitalism, as Daron Acemoglu argues. Different countries will sharply diverge in their response to this “critical juncture”. The ones who better succeed will introduce stronger democratic institutions to keep governments in check, as both Acemoglu and Lucrezia Reichlin argue. We also need to improve the way public organisations are managed, a focus of the interviews with Raffaela Sadun and Carol Propper.  Wendy Carlin explains how balancing this larger role for the state requires building a stronger and more resilient civil society – strengthening the ‘third pole’.

This all sounds really interesting. Economics and economists are most interesting when out of the political boxes! 

Tackling climate change. ... Reducing carbon emissions, as Michael Greenstone explains in his interview, must be the only priority – not to be confused with delivering the goodies to voters. 

Voters and interest groups. Mother Gaia does not care if the electric car charging stations and solar panels are made in the US by union members or made in China at a tenth of the cost. 

Yet, after the pandemic, as Nick Stern argues, investing in tackling climate change is the best way to invest for the post-pandemic recovery. 

I will not pre-judge, but if this is more broken windows fallacies and create more jobs by using spoons not shovels, I will be skeptical. 

In sum, this looks interesting throughout and a good view into the spectrum of analysis that economists are bringing to contemporary issues. 

The list of interviewees is 

Debt sustainability

Markus Brunnermeier: Let’s compare the central bank to a race car
John Cochrane: Throwing money down ratholes
Jesús Fernández-Villaverde: Economists and the pandemic
Agnès Bénassy-Quéré: How to design a recovery plan

Tackling inequality

Oriana Bandiera: Overcoming poverty barriers
Stefanie Stantcheva: Taxes and social economics
Esteban Rossi-Hansberg: Will working from home kill cities?
Atif Mian: The savings glut of the rich

A more balanced globalisation

Dani Rodrik: Globalisation after the Washington Consensus
Pol Antràs: Is globalisation slowing down?
Michael Pettis: Trade wars are class wars

Containing the new leviathan

Daron Acemoglu: The Great Divergence
Wendy Carlin: The Third Pole
Lucrezia Reichlin: Democratising economic policy
Carol Propper: Targets and terror
Raffaella Sadun: Management for the recovery

Promoting innovation and curbing the power of digital giants

Philippe Aghion: Is ‘cutthroat’ capitalism more innovative?
John Van Reenen: The Lost Einsteins
Fiona Scott Morton: What should we do about big tech?

Combatting global warming

Nicholas Stern: Zero-emissions growth
Michael Greenstone: The real enemy here is carbon

NBER monetary economics is up to date

I just got the program for the upcoming NBER summer institute monetary economics conference program.  Who says academics aren't up to the minute on policy issues? This will be interesting. 

 

More inequality

Paul Graham adds interesting thoughts on inequality, looking at the Forbes 100. Maybe we don't have enough inequality, and maybe the rise in inequality (especially of wealth) since the 1970s represents too little inequality then, not too much now. Contra the usual in politics, a change is not always a problem, but sometimes for the better. How? Read on. 

Contra the mantra of inherited wealth, the super-rich in America today largely earned their way there from middle class, by starting new companies. They did not inherit wealth. The rich did not get richer. They were superseded by the (fabulously) nouveau-riche. 

In 1982 the most common source of wealth was inheritance. Of the 100 richest people, 60 inherited from an ancestor. There were 10 du Pont heirs alone. By 2020 the number of heirs had been cut in half, accounting for only 27 of the biggest 100 fortunes.

Why would the percentage of heirs decrease? Not because inheritance taxes increased. In fact, they decreased significantly during this period. The reason the percentage of heirs has decreased is not that fewer people are inheriting great fortunes, but that more people are making them.

How are people making these new fortunes? Roughly 3/4 by starting companies and 1/4 by investing. Of the 73 new fortunes in 2020, 56 derive from founders' or early employees' equity (52 founders, 2 early employees, and 2 wives of founders), and 17 from managing investment funds.

...

 the main source of new fortunes now is starting companies, and when you look at the data, you see big changes there too. ....

Inequality mirage?

David Splinter and Gerald Auten gave last week's Hoover Economic Policy Working Group seminar, summarizing their past and some work in progress on the distribution of income.  Link in case the above embed does not work. A recent paper. Splinter's web page. 

Splinter and Auten are very even handed, just-the-facts, economists. I'll pass on their facts. Grumpy interpretations are my own. 

It is a fact generally accepted that income inequality has grown a lot recently, and this is a "problem" to be "solved." So what if the great inequality crisis simply isn't true? Let's leave aside whether income is a good measure (it isn't), let's just look at the fact, has income inequality substantially increased? 

No. Here is the headline result. In their careful redoing of the numbers, the top 1% share of income has barely budged since the 1970s. (And, by the way, if you think the mid 1970s economy was the great happy prosperity we should try to reestablish, you're too young to remember the 1970s.)

Now we get in to a deep under the hood exercise about costing up income, and where did Piketty and Saez go wrong. The video has some of that. The papers have more, and a long list of back and forth, including comparisons with many other studies. I'll name just a few.

Omitted income.   Piketty Saez leave out many kinds of income. Auten Splinter attribute all national income to somebody.  Before 1986 many wealthy people were incorporated.  Leaving out corporate income biases the early shares down. Auten Splinter fix that. Pre-tax and transfer income! Who cares about pre-tax income! Auten Splinter calculate income after taxes at the top -- lower -- and including transfers at the bottom -- higher. Demographics. Marriage rates have fallen, so Auten Splinter calculate income by individuals. Benefits! They include benefits like employer-provided health insurance.

One can quibble, but one can quibble. At least this cornerstone "fact" of political debate is a lot less sure than it looks. 

If the rich aren't getting richer, the poor aren't getting poorer:

Ip on Bidenomics

Greg Ip has a great column in the WSJ on Bidenomics.  It's not long, it's so well written that it's hard to condense the good parts, and you should really read it all. 

There is an intellectual framework to Bidenomics, and with that a scarily more durable move on economic policy. 

There used to be 

"certain rules about how the world worked: governments should avoid deficits, liberalize trade and trust in markets. Taxes and social programs shouldn’t discourage work."

By contrast President Biden's (really his team's) "embrace of bigger government" is founded on different economic ideas. To wit, abridged: 

Growth

Old view: Scarcity is the default condition of economies: the demand for goods, services, labor and capital is limitless, their supply is limited. ...faster growth requires raising potential by increasing incentives to work and invest. Macroeconomic tools—monetary and fiscal policy—are only occasionally needed to deal with recessions and inflation.

New view: Slack is the default condition of economies. Growth is held back not by supply but chronic lack of demand, calling for continuously stimulative fiscal and monetary policy. J.W. Mason.. said, that “‘depression economics’ applies basically all of the time.”

I guess I'm an old fogie. 

Defining inequality so it can't be fixed

In one of their series of excellent WSJ essays, Phil Gramm and John Early notice that conventional income inequality numbers report the distribution of income before taxes and transfers. After taxes and transfers, income inequality is flat or decreasing, depending on your starting point. 

Source: Phil Gramm and John Early in the Wall Street Journal

If your game is to argue for more taxes and transfers to fix income inequality, that is a dandy subterfuge as no amount of taxing and transferring can ever improve the measured problem! 

Techsodus/Techsit politics.

The tech industry is fed up and leaving San Francisco in particular, the valley and California in general. Covid, like a war, speeds things up. If you're a young economist you could do worse than study this latest chapter in the (likely) decline of great cities (SF, NY, LA? Chicago?) and the movement of people and industries to friendlier, safer, and more welcoming climates. If you're a young political economist, whether they bring with them the politics that destroyed the places they left behind -- slash and burn progressivism -- will be equally interesting to watch. 

I ran across a great essay on this saga by Mike Solana. 

The latest fashion is to claim it's immoral for tech founders and companies to leave, after they have "extracted" so much wealth here. Mike skewers this new fashion, pointing out that tech companies and their founders created wealth here.  Microcode is not mined like gold. 

I take extreme issue with the notion that industry leaders have taken something from the “community,” ...This is precisely the opposite of reality. ... They are the network. Technology workers do not “extract” value from the region, they are what makes the region valuable.

...the Bay Area’s nativist, anti-immigration political climate has certainly not created the tech community, which is populated largely by immigrants, be they from out of the state or out of the country 

But he really digs in on the culture and politics that is going to send this golden goose packing to Austin: 

 the technology industry has brought tremendous tax revenue to the Bay Area. The budget of San Francisco literally doubled this decade, from around six billion to over twelve billion dollars. With our government’s incredible, historic abundance of wealth, the Board of Supervisors has presided over: a dramatic increase in homelessness, drug abuse, crime — now including home invasion — and a crippling cost of living that can be directly ascribed to the local landed gentry’s obsession with blocking new construction. ...

"Landed gentry." That's really good.  

Walter Williams and Economics

 "For 40 years Walter was the heart and soul of George Mason’s unique Department of Economics. Our department unapologetically resists the trend of teaching economics as if it’s a guide for social engineers. This resistance reflects Walter’s commitment to liberal individualism and his belief that ordinary men and women deserve, as his friend Thomas Sowell puts it, “elbow room for themselves and a refuge from the rampaging presumptions of their ‘betters.’" 

My emphasis on the two best parts. This paragraph is from Don Boudreaux' WSJ oped for Walter Williams. The highlighted phrases (my emphasis) stuck out to me as a brilliant encapsulation of where economics research and practice has gone, as well as teaching, in the last few decades. A guide for social engineers, indeed. Most papers end up with "policy conclusions" that amount to intensely complex advice for all-powerful (yes) and all-knowing (ha) "policy-makers" aka social engineers. Economics was once more about how people searching for a little elbow room are empowered to help themselves and their neighbors. 

Walter Williams passed this week and Ed Lazear passed last week. I am not only saddened by their loss, but that stirring bits of  the Chicago - UCLA - George Mason economic philosophy seems to take place increasingly in obituaries.   

One tidbit

OECD talk -- rebuilding institutions in the wake of Covid-19

Friday morning I had the pleasure of participating in a session at the OECD, as part of their program on Confronting Planetary Emergencies - Solving Human Problems. I had the tough job of following brilliant remarks by Acting CEA chair Tyler Goodspeed and Ken Rogoff, and discussing great questions all starting at 5 AM. 

FYI here is the text of my prepared remarks. My focus is how to rebuild the competence of our institutions, which failed dismally in this crisis. 

(Update: Video of the event including Tyler Goodspeed's amazing critique,  plus Ken Rogoff's insightful talk. Thanks to Fahim M. from the comment below. Unknown says the audio is available on the main page, but I couldn't find it. )  

Covid and Beyond

John H. Cochrane

Remarks at the OECD, October 9, 2020

I very much appreciate the opportunity to speak today. Looking at some of the background documents, and listening to Tyler, I recognize that our panel is decidedly contrarian to the main views the OECD is pursuing, and those of the stars that you invited for previous panels. It says good things about the OECD that you want to listen to and understand heretical views.

I will try to answer to your question — what lessons should we take from the Covid experience? Many people say that “Covid changes everything.” I do not think the lesson is so radical. But the Covid  experience does, I think, bring to the fore and make urgent underlying problems that we need to address sooner rather than later. My “we” is global, and international institutions such as the OECD have a key role to play in this institutional regeneration. 

My theme is that we witnessed an outcome of grand institutional failure. We must reform our institutions, restore their basic competence, and thereby trust in that competence. We must de-politicize our institutions and insist that they return to the narrow focus of their competence. Trust must be earned. 

This erosion of our institutions has been going on for a long time now. in my view, the populist eruption, as well perhaps as much of the left-wing authoritarian woke eruption, stems from the view that elites don’t know why they are doing. That was laid bare in financial crisis, in many foreign policy misadventures, and laid bare by covid once again.

We are in a "planetary emergency." It is an emergency coming from the decay, or decadence if you will, of our governing institutions. They need to restore basic competence, not to embark on grand new adventures.  

The disease will pass, likely sooner rather than later due to the extraordinary inventiveness of our pharmaceutical and scientific institutions. The heroic efforts of doctors, and the speed with which they have learned to treat covid is remarkable. Diseases always have passed. And economies and societies returned to normal.

Covid -19 is, however, a fire drill, a wakeup call, a warning sign. It is almost perfectly designed to that purpose. It is just serious enough to get our attention, in a way that H1N1, SARS, and Ebola, were not.  But compared to plague, smallpox, typhus, cholera, 1918 influenza, the death rate is tiny.  

There is a virus out there, natural or engineered, that spreads like this one and kills 20% or more of the population. It will come sooner than we think. And we are wildly unprepared.  Ken Rogoff rightly points to a range of other tail events that we are wildly unprepared for. Antibiotic resistant bacteria.   Massive computer failure. Even a small nuclear war. 

Let us look somewhat chronologically at the list of failures in the last year.

Heckman Haiku

Jim Heckman's interview with Gonazlo Schwartz at the Archbridge Institute is making the rounds of economists. I admire it for how much the interviewer and Heckman pack in so little space, so pithy, well expressed, and so happy to trounce on today's pieties. (As blog readers will have noticed, short does not come easily to me.) It's hard to summarize a Haiku -- go read the whole thing. But I'll try.

Gonzalo Schwarz: Many commentators have said that it is not possible to achieve the American Dream any more in the United States. Do you think the American Dream is alive and well?

Dr. James Heckman: Ask any immigrant. They are grateful for the chances that America has given them. Many came with nothing. They live in decent neighborhoods and their families have better lives than they could have before coming here. Their children go to college and integrate into American society. The progress of African Americans over the past century is staggering. Many have shaken off the legacies of poverty and discrimination....

Social mobility:

G: ...what do you think are the main barriers to income or social mobility?...

H: The main barriers to developing effective policies for income and social mobility is fear of honest engagement in the changes in the American family and the consequences it has wrought. It is politically incorrect to express the truth and go to the source of problems.... Powerful censorship is at play across the entire society....The family is the source of life and growth. Families build values, encourage (or discourage) their children in school and out. Families — far more than schools — create or inhibit life opportunities. A huge body of evidence shows the powerful role of families in shaping the lives of their children. Dysfunctional families produce dysfunctional children. Schools can only partially compensate for the damage done to the children by dysfunctional families.

He is right on the fact, how blissfully it is ignored by those wishing more "policies" to address inequality and other social programs, and censorship against those who say it.

On "current academic and policy discussion on income mobility and inequality, "

A Better Wealth and Taxes

CATO has put out a much-improved version of my "Wealth and Taxes" series on wealth inequality and the wealth tax. Html here and pdf here. Many thanks to Chris Edwards and the CATO staff for editing and formatting it, and getting it out in this nice format. 

********

Alan Reynolds wrote with interesting comments. Among others,

the $18+ trillion now invested in retirement, education and health savings accounts has gradually made middle-income investment income more and more invisible in tax returns as time moved on.   Exemption of $500,000 of capital gains on home sales further reduced the IRS-reported capital income of all but the top 1%.

...the Saez-Zucman methodology is sure to show the rich having a larger and larger share of taxable income from capital, and therefore of wealth based on that taxable income, because income from the savings of middle-income taxpayers has become increasingly unreported. 

Bottom line:

Because tax laws exempted a rising share of investment income (and residential capital gains) of the bottom 95%, the visible portion left showing for the top 1% must appear as a rising share (of a meaningless total). 

I still like my 2006 WSJ title: "The Top 1% of WHAT?"  Pre-tax, pre-transfer income reported on individual income tax returns was never meaningful, and capital income on those tax returns is incomparable over time. 

The Elephant's family

David Brooks essay in the Atlantic "The nuclear family was a mistake" has a lot of interesting ideas. We used to (1800s) largely live with extended family. In the mid 20th century we moved to mom, dad and kids, the nuclear family that David thinks is a mistake. Now we increasingly live the widely parodied Life of Julia (Taranto scathing review at WSJ, guide to parodies at Atlantic), individuals whose main relationship in life is to the federal government.

One aspect, tangential to the main theme, struck me. In all our economic discussions about inequality, when we stop shouting at each other, we come down to a commonsense middle ground: There are lots of obstacles in the way of economic, personal, and social advancement for Americans who start on the lower end of the economic ladder. Free marketers tend to point to government obstacles -- horrible schools in the thrall of teacher unions, land use policies that make it impossible to live near better jobs, social programs whose disincentives to work or move to work make that an impossible choice, and so on. Government-run-things advocates ask for more programs, a 58th job training program, UBI, government jobs, government provided housing, more money to the teachers unions, government-run pre-k and day care, gushers of money, and so on. Still, we get to a comfortable point that we agree on a problem, and we're talking about various ways to fix it.

Into this comfortable discussion, Brooks' essay points to the elephant in the middle of the room.  People on the lower economic end in this country start their lives in chaotic families.

In 1970, the family structures of the rich and poor did not differ that greatly. Now there is a chasm between them. As of 2005, 85 percent of children born to upper-middle-class families were living with both biological parents when the mom was 40. Among working-class families, only 30 percent were. According to a 2012 report from the National Center for Health Statistics, college-educated women ages 22 to 44 have a 78 percent chance of having their first marriage last at least 20 years. Women in the same age range with a high-school degree or less have only about a 40 percent chance. Among Americans ages 18 to 55, only 26 percent of the poor and 39 percent of the working class are currently married.

 In 1960, roughly 5 percent of children were born to unmarried women. Now about 40 percent are. The Pew Research Center reported that 11 percent of children lived apart from their father in 1960. In 2010, 27 percent did. Now, if you are born into poverty and raised by your married parents, you have an 80 percent chance of climbing out of it. If you are born into poverty and raised by an unmarried mother, you have a 50 percent chance of remaining stuck.

Nothing, nothing, in our pleasant dirigiste anti-inequality debate adds up to these kinds of numbers. A year of government run pre-K while not even talking about these facts is like handing out bandaids to cancer patients.

Grumpy Podcast

We're trying a Grumpy Economist Podcast. The first one talks about my series on wealth inequality and wealth tax. I can't stand listening to myself, as think I always sound dumb and regret all the things I could have said better, so I haven't listened. But I hope it sounds better to the rest of you and provides a useful new grumpy outlet. Thanks to Scott Immergut and Troy Senik who do all the work. 

Wokeademia

I'm working on an economic view of political polarization. One aspect of that project is the extent to which many institutions in our society have become politicized. Today's post is one little data point in that larger story. It tells a little story of how to politicize an institution and silence dissenters.

Jerry Coyne reports on the "diversity equity and inclusion statement" required of anyone hired by the University of California, or desiring a raise or promotion. This is a required statement each candidate must write "Demonstrating Interest in and Ability to Advance Diversity, Equity, and Inclusion." It's not about whether you are "diverse," meaning belonging to a racial, gender, or sexual-preference group the University wishes to hire. It is a statement, as it says, of your active participation in a  political movement.

Ferguson and the billionaires at Davos

In my last post, I commented on Joe Stiglitz view, heading to Davos, that billionaires and corporate leaders are anxious to pollute the air.  In my wealth tax series I reported on the popular view on the Warren Sanders Saez Zucman view that corporate leaders and billionaires represent a regressive right wing political force, that must be stopped by any means including expropriation of their wealth, even if that means destroying the businesses that make them rich.

My colleague Niall Ferguson reports from Davos what seems actually to be on billionaires' minds: 

Take the World Economic Forum (WEF), the gathering of billionaires, millionaires, world leaders, do-gooders, busybodies and journalists that takes place each January in the Swiss resort of Davos. The overwhelming majority of people attending this year’s conference would, I have no doubt, affirm their commitment to reducing carbon dioxide emissions to avert catastrophic climate change, even while on board their Gulfstreams and in their Range Rovers.

I doubt if a single chief executive present at the WEF last week would dare publicly to challenge the view that a modern corporation should rigorously measure and regulate its behaviour in terms of its environmental and social impact, as well as its quality of governance (ESG, for short). As the US Business Roundtable declared last August, firms must now be run not only for the benefit of their shareholders but also for all their “stakeholders”: customers, employees, suppliers and communities. Milton Friedman is dead. Long live Klaus Schwab — founder of the WEF — who pioneered this notion of stakeholder capitalism.

“ESG-omania” (or “ESG-apism”) meant Davos 2020 was an orgy of virtue-signalling on climate change and diversity. To walk down Davos Promenade, the main drag, was to run a gauntlet of uplifting corporate slogans: “Sustainable solutions for Earth, for life”; “A cohesive and sustainable world starts with data”; “Let’s bring sea level and C-level together”.

Each year the WEF’s global risks report tells us what the business elite is most worried about. Ten years ago, the top five risks were “Asset price collapse”, “China economic slowdown”, “Chronic disease”, “Fiscal crises” and “Global governance gaps”. This year? “Extreme weather”, “Climate action failure”, “Natural disasters”, “Biodiversity loss” and “Human-made environmental disasters”.

(Related, the Wall Street Journal reported last week that Goldman Sachs will no longer fund fossil fuel development in the Arctic, or any US company that does not have women or "diverse" board members. And Jan 27, quotes "Salesforce chairman and co-CEO Mark Benhoff that "capitalism as we have known it is dead, and this obsession that we have with maximizing profits for shareholders alone has led to incredible inequality and a planetary emergency." ) 

In public, at least. In private, 

In quiet corners of the Davos congress centre you could hear Europeans wishing they could have at least a piece of this American action [Trumpian growth]— and complaining that Greta’s demand for “zero carbon now” was a recipe for zero growth.

... you say one thing in public and another in private. It was once the basis of life in communist systems all over the world. It turns out to be something capitalists can do just as easily, ...

Business people adopt whatever public views are convenient. And their public virtue-signaling means that winds now blow from the left. 

If Davos Man has come around to Trump — enough to expect, if not quite to hope, for his re-election — it is no guarantee that he will win on November 3. If January 2016 is anything to go by, you should probably bet against the Davos consensus and have a flutter on Bernie Sanders.

Niall organizes his thoughts around  "cognitive dissonance." Good old-fashioned "Hypocrisy" might be a more apt word. As in 

Do you give speeches about climate change at international conferences, having flown there by private jet? Do you ever sit in a big black car in a traffic jam, when you could quite easily have walked, despite knowing that this, too, is adding yet more carbon dioxide to the atmosphere?

Exhibit A: 

In this green new world, Davos Man must now prostrate himself before Stockholm Girl: 17-year-old Greta Thunberg, who delivered her latest tirade on Tuesday morning. “We don’t need a ‘low-carbon economy,’ ” she declared. “We don’t need to ‘lower emissions’. Our emissions have to stop. ...

I love Greta Thunberg, because she exposes the immense hypocrisy of the political climate establishment. When she went to school, she received the same alarmist pablum handed out to children around the world -- the climate is a crisis. Civilization is going to end. The world will be a red hot cinder in your lifetime. We have exactly 11 years to stop it. The other children, like those in communist countries including China today, understood the game. Mouth the pieties, get a good grade on the test, don't argue, and go out to play. Greta, who describes herself as neuro-diverse, took it seriously and literally. Well, if the planet is going to fry in exactly 11 years we darn well had better do something about it, and not just virtue-signal in our PR statements and buy some phony carbon offsets when we fly the Gulfstream back from Davos.

Niall's last point is excellent:

In the same way, if it’s climate change the WEF-ers are most worried about, you should probably brace yourself for a coronavirus pandemic. Talking of cognitive dissonance, what the hell were we all doing at a massive global conference last week? Fact: at least three of the WEF attendees were from — you guessed it — Wuhan.

What are the really big risks in the next 10 years? Pandemic, nuclear war, civil war, government collapse. The ones very few people are paying any attention to. The big ones are never the ones conventional wisdom sees coming a hundred years away.

Update:

On reflection, hypocrisy is not a good word either. What do you call the behavior, of mouthing platitudes that you know to be meaningless or false, from good old self interest? You know a Warren or Sanders presidency is a good possibility, and they will use the regulatory and judicial machinery ruthlessly. So let's get those public statements and virtue signals out fast -- support for "stakeholder" capitalism, climate crisis, "ESG" metrics or whatever it takes. You know that social climbing at Davos, your nonprofit boards,  (your hope to become dean someday, in academia) or just avoiding the twitter mob demand conformity. So you mouth the harder and harder to pronounce words, or even convince yourself of the worthiness of it all.  There must be a good word in  Russian, the art of getting along under a communist regime.  We say "virtue-signaling" but that does not cover the self-interest of going along with the crowd. I welcome suggestions for a good word.

The best of times, or the worst of times?

So how is the economy doing? A good friend passed along for comment a recent project syndicate essay by Nobel Prize winning economist Joe Stiglitz. For an alternative view, I found interesting commentary on the CEA website,  "The Impact of the Trump Labor market on historically disadvantaged Americans" and "The blue-collar boom reduces inequality"

A fact that cannot be missed is that overall GDP is growing. In terms of the overall economy, 2019 was the best year in all of human history. The 3.5% unemployment rate has not been this low since December 1969. So, if we wish to complain, it must be that this prosperity is not evenly shared. (I would also complain that things could be much better, but neither of our essays today is really about that point. Free-market paradise will have to wait.)

Stiglitz:

As the world’s business elites trek to Davos for their annual gathering, people should be asking a simple question: Have they overcome their infatuation with US President Donald Trump?

Two years ago, a few rare corporate leaders were concerned about climate change, or upset at Trump’s misogyny and bigotry. Most, however, were celebrating the president’s tax cuts for billionaires and corporations and looking forward to his efforts to deregulate the economy. That would allow businesses to pollute the air more, get more Americans hooked on opioids, entice more children to eat their diabetes-inducing foods, and engage in the sort of financial shenanigans that brought on the 2008 crisis.

Wealth and Taxes, Part V

Wealth and Taxes Part V -- it's all about politics

(This is Part V of a series. See the overview for a summary of the other four)

So if wealth is not the answer to "how big is inequality," by any sensible measure, and if the wealth tax is not the answer to "what's the best way to raise money, or to redistribute income,"  if in fact wealth and wealth taxes are terrible answers to these questions, what is the question to which the wealth tax is the answer, and alarmist measures of wealth inequality to buttress it the pathway?

It's right there clear as day in Saez and Zucman's  Jan 22 2019 New York Times Oped

Their [high marginal tax rates] root justification is not about collecting revenue...high tax rates for sky-high incomes do not aim at funding Medicare for All. They aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.

An extreme concentration of wealth means an extreme concentration of economic and political power… Democracy or plutocracy: That is, fundamentally, what top tax rates are about. 

Well, now we have at least an honest question to which confiscatory taxation is the answer.

• The point of the wealth tax is to destroy the supposed political power of billionaires by destroying their wealth. 

We could have saved a lot of time and effort if we had just started there and not wasted time on phony economic arguments!

Economic distortions are a feature not a bug. In optimal taxation theory we try to find taxes that raise revenue and don't kill the golden goose that lays eggs. The whole point here is to kill the golden goose.

• The wealth tax is successful when it raises no revenue, when it destroys the wealth subject to tax.  

Even more clearly:

That few people [in the 1960s] faced the 90 percent top tax rates was not a bug; it was the feature that caused sky-high incomes to largely disappear. 

Is your jaw dropping yet?

(The quote is also a... misleading statement. 90 percent tax rates made reported incomes disappear and tax shelters explode.)

In optimal tax theory, the point is to get resources without disincentives -- to tax the rich without discouraging people from becoming rich, so they can get rich and pay the taxes. Here the point is exactly the opposite. They want to tax billionaires to the point that there are no billionaires.

• The point of the wealth tax is to destroy the incentive to become rich. 

Why? If you view all wealth as ill-gotten, basically criminal, as perversions of democracy then you want to destroy the incentive to engage in those nefarious activities.

Well, no wonder we've been arguing and getting nowhere! As usual we're starting from different premises.

Saez and Zucman are not particularly consistent, arguing in many other places that the wealth tax will raise lots of revenue rather than just destroy wealth. They advise Senator Warren who has made big revenues a central part of her policy agenda. She wants the wealth tax precisely to fund Medicare for all, which Saez and Zucman just said is not the point. I find that sort of inconsistency very annoying, and telling of a political agenda which they're not willing to state honestly in many circles.

• Will the real wealth tax please stand up? Is it supposed to raise a lot of revenue, or is it supposed to get rid of billionaires, after which it will raise no revenue? Make up your minds, please.  

An amusing aside

"The view that excessive income concentration corrodes the social contract has deep roots in America — a country founded, in part, in reaction against the highly unequal, aristocratic Europe of the 18th century." 

I guess I can forgive two Frenchmen for being a little foggy on American history. Our revolution had a lot to do with paying British taxes, not guillotining the aristocracy. In modern language, Americans wanted opportunity, not redistribution. The Boston Tea Party was not a demand that Britain tax its aristocrats, either to send money instead of tea, or just to tax them out of existence because "inequality" was galling the Americans.  The American Revolution was run by the wealthiest in this country, and was if anything about keeping property, including slaves.

Do billionaires really run the country?

We have left economics long ago, but does this idea make any sense? This is a mantra of the extreme left. John Cassidy, writing in the New Yorker to cheer these ideas

Meanwhile, the Citizens United ruling, the rise of super pacs, and the lurch to the right of the Republican Party and, of course, the Trump Presidency have demonstrated the growing political power of the billionaire class. 

I'm scratching my head here. Just what billionaires are they worried about? Tom Steyer? Michael Bloomberg? George Soros? Bill Gates, devoting his billions to global charities? The Business Roundtable CEOs who endorsed "stakeholder capitalism" as fast as you can say "Warren just passed Biden in the polls?" The readers of the New Yorker? (Look at their ads and the NYT Style section. They don't run ads like that on Fox News!) Pete Buttigieg's wine-cave buddies? It strikes me that the billionaires in this country are by and large achingly progressive coastal elites. (see Ryan Bourne at Cato "Has Wealth Inequality Eroded U.S. Democracy" for numbers showing political preferences of the very rich.)

That billionaires bought Trump the election is simply untrue. Chris Edwards and Ryan Bourne:

not one CEO in the Fortune 100 had donated to Trump’s election campaign by September 2016. His victory did not stem from influence by the wealthy but more from grassroots opposition to wealthy coastal elites. 

The money was on Hilary Clinton, who spent nearly double what Trump did. I perceived Clinton, famous for Goldman-Sachs speeches, as just the kind of candidate one who dislike cronyism should worry about.

Well, dark conspiracy theories are hard to disprove. But at least now you know what worldview leads, logically (at last) from its premises to a wealth tax. You can decide if you buy these premises. It has, by admission, nothing to do with revenue, and little to do with economics.

The argument goes on that billionaires have too much "economic power." Progressives are great with language, and you usually see wealth "controlled" by the 1% not just "owned," or heaven forbid "earned" by the 1%. I will leave to your imaginations just what that means.  If you have a billion dollars in treasury bills and the Vanguard index fund, just what "power" does that give you?

A wealth tax would also be a dandy way to bring billionaires in, with their tax lawyers, accountants, lobbyists, and favorite congresspeople for a once-a-year trip to the confessional, to discuss how the IRS will value various complex entities, along with their twitter accounts, charitable and campaign contributions, and just how their businesses are doing on advancing the green new deal and diversity and equity programs. As long as we are scratching our heads trying to find the question to which the wealth tax is the answer, this is a pretty good one.

Off with their heads!

The world-view is expressed even more clearly by Bernie Sanders:

or perhaps George Bernard Shaw

“The more I see of the moneyed classes, the more I understand the guillotine.”

The point really is decapitation. "Inequality"  is (Saez and Zucman) such a "crisis" that we are better off just getting rid of billionaires, even if that means throwing all their wealth and the businesses that provide their income in the ocean. While it is often pointed out that any concern with inequality means are better off if a rich person loses $100 and a poor person loses $1, this is a pretty extreme version of that view.

Ill-gotten wealth 

A second argument lies behind the wealth tax: it's all ill-gotten money, or luck. Zucman and Saez again

progressive income taxation... restrains all exorbitant incomes equally, whether they derive from exploiting monopoly power, new financial products, sheer luck or anything else…

Can you think of a few anything elses' that are missing here?

Robert Reich opines that there are only five ways to make a billion dollars

" exploit a monopoly;...get insider information unavailable to other investors,... buy off politicians,...extort big investors,...get the money from rich parents or relatives."

Just who made their iPhones, I'd like to know?

Edwards and Bourne document much more extensively a view more consistent with my reading of the facts,

Most of today’s wealthy are business people who built their fortunes by adding to economic growth, and some have created major innovations that benefit all of us. The share of the wealthy who inherited their fortunes has sharply declined in recent decades

In particular, the Piketty story of centuries old inherited wealth growing at r>g is a fable. The rich are not getting richer. All of today's rich are nouveau. At best, this generation's self-made internet gazilloinaires and hedge fund managers made more money than the last generation's Waltons and bond traders.

There is an element of truth, as in all fables. Edwards and Bourne go on,

...cronyism, which refers to insiders and businesses securing narrow tax, spending, and regulatory advantages. Cronyism is one cause of wealth inequality, and it has likely increased over time as the government has grown.

The really big billionaires -- google, Facebook, apple, etc. -- unquestionably built tremendous products, and pocketed a tiny fraction of the resulting benefit. But there is a lot of cronyism and exploiting government-granted monopolies in the US economy for sure. The epi-pen story is not isolated. Banking, courtesy of Dodd-Frank barriers to entry. Health care. We can grant that Vladimir Putin did not get wealthy from an innovative tech startup.

But to the extent that wealth is amassed by exploiting regulations, regulatory barriers to entry, special favors from the government, tax deals, is more government really the answer? How is it that the politically connected super wealthy can get massive breaks from corporate taxes (how Reich thinks the Koch brothers made their money), but they won't get, well, massive breaks from the wealth tax? If too much government is the problem, inviting cronies to lobby for government to use its power on their behalf, just how is more government the answer? Bloody Marys don't work for a hangover.

Well, at least now we know what we're talking about. If you live on the Saez, Zucman, Reich planet, and you think destroying billionaires' wealth won't ruin your business too or deny you the benefits of economic growth, and you think that their politicians can operate a confiscatory tax regime without opening the same crony Pandora's box that they claim cause the problem in the first place, you like the wealth tax.

At least they should stop the pretense this has anything to do with revenue, economics,  optimal taxation, expanding economic opportunity for the lower end of America, and so forth. As Warren advisers, they might want to inform her before the next debate, ah, this is not about raising revenue. And we should stop falling for this trap as well, and wasting our time on part I-IV arguments.

Bottom line

I want to end on  two positive notes. I started all this with a discussion of  Smith, Owen, and Zwick. As we saw in part I it cleans up some of the egregious thumbs on scale in Saez and Zucman, and taught me just how fraught the whole "capitalization" idea to measure wealth is. It's a good example of an industry of papers that quickly tore apart the Saez Zucman numbers.

But I fault Smith, Owen and Zwick, and most of their fellows, for meekly taking the questions at face value. Their paper  "builds on the pioneering work of Saez and Zucman (2016)." They "follow Saez and Zucman (2016) in defining wealth." They calculate static revenues from a wealth tax. But we just found out that this was all a red herring as the point is to destroy wealth not tax it. They offer nothing to question the idea that if this definition of "wealth" has become more unequal, "policy" should do something about it.   One can at least point to a literature, such as Edwards and Ryan, that do question the question, or Saez and Zucman's own opeds that suggest a very different set of questions.

Thus, I fault this paper, and its companions, for taking the questions at face value. You see the  agenda.  You’re being suckered into a rope-a-dope. The right response is that this is the wrong question, an utterly silly question, and one can at least say that.

This series is really about conciliation. Unlike other economists, I don't want to presume we're all asking the same question and Saez and Zucman are dummies. I want to respect that they are smart, so if they are coming to a different answer, it must be because they have a different question. In today's post, we now have a set of world views that does at last have some logic, which one can debate. In that spirit, I close with a Saez quote which which I agree completely:

"My sense is really that the public will favor more progressive taxation only if it is convinced that top income gains are detrimental to economic growth of the 99%, and that taxation can ameliorate this. In America, people do not have a strong view against inequality per se, as long as inequality is fair. And what does fair mean? As an economist, you would say fair means that individual income and wealth reflect the value of what people produce or otherwise contribute to the economic system. This is why distinguishing between the standard supply side scenario versus the rent-seeking scenario is so important." 

Amen, brother Saez. And, if rent-seeking is the problem, explain to us how an enormous wealth tax will not attract the same rent-seekers who game the obscene income, corporate, and estate taxes today.

In the end, this is all about power. Sure, let's call it "economic power" as well as political power. Saez and Zucman want to transfer power from private hands to the government, and eliminate a potential source of power, a source of competition to the incumbent government.

Whether that is a good idea depends essentially on your view of just how bad private vs. government power is. I'm a (many adjectives) libertarian, and I see even in the worst excesses of private power some discipline of competition or potential competition restraining it. I see most private power as given to the powerful by government in exchange for political support, which is really an expression of government power to suppress that competition.  The defining character of government power is lack of competition and a monopoly of force. The essence of Saez and Zucman is to reduce the competition for power faced by whoever runs the government.  Historically, I see the damage of extreme government power -- Soviet and Chinese Communism, German Nazism -- as orders of magnitude worse than even the worst caricatures of private power, especially of private power that does not derive ultimately from or require support from state power -- perhaps the Victorian dark satanic mills?

I presume Saez and Zucman agree they don't want to hand massive power to this administration, or a Republican Congress, or maybe even to the branch of the Democratic Party that handed out the cronyist goodies to billionaires they decry. So the argument must be that the "good politicians" will take over, will stay in power, will arrange never to hand the reins to a future Trump, and this time they will not misuse a monopoly of power, made ever stronger by lack of private economic or political power to challenge it.  Just put us bien-pesants in charge and all will be well.

I'm dubious of anyone making that claim, made so often in the past. I don't favor a libertarian dictatorship either.

They claim to worry about "inequality." Many government-run states -- Cuba, say, or Soviet Russia -- had much less measured income inequality. But if this is really all about "power," we should not fail to note that those states had much more inequality of power. Stalin may not have reported a lot on his income taxes, but he essentially owned a whole country.

More

Chris Edwards and Ryan Bourne at Cato have a nice series on inequality issues here (study, also pdf)  here (blog post). Ryan also takes on the final question that this series builds to, Has wealth inequality eroded democracy?

The Saez Summers Mankiw debate is informative.  See also Summers and Natasha Sarin on the wealth tax. If you're following politics, this really is about the soul of the Democratic Party and its economic views, Summers vs. Saez-Zucman as it is about Biden vs. Warren, Sanders, AOC.

My Hoover colleague David Henderson wrote a nice blog post on the topic, including coverage of the  debate.

"Emmanuel Saez... made his case for a tax on wealth and claimed that the wealthy have disproportionate influence on economic policy. In a segment that is beautiful to see (from about the 1:07:00 point to the 1:09:30  in this forum), Larry Summers challenged Saez to give an example where reducing wealthy people’s wealth by 20 percent would produce better political, social, or cultural decisions. Summers to Saez: “You’ve been making this argument for years. Do you have one example?” Saez didn’t. Summers went on to make the point that very wealthy people can have large influence by spending a trivial percentage of their wealth. Even heavy taxes on wealth would leave them quite wealthy."

"In his earlier presentation on the panel, Summers made another important point. He considered three activities that wealthy people engage in.  Activity A is continuing to invest it productively. Activity B is consuming it—for  example, by hiring a big jet and taking their friends to a nice resort. Activity C is donating it to causes and, if the causes are political, having even larger influence on political causes than they have now. Both B and C are ways to avoid a tax on wealth; A is not."

Interestingly, in the above oped, Saez did have examples, like the interesting claim that Russia became oligarchic and Japan did not (?) because Russia wasn't taxing enough. I would have been interested to hear Larry's response to that one.

From Nihai Krishan in the Washington Examiner

Larry Summers... has called Saez and Zucman’s estimates for the revenues generated by the wealth tax “naively high.” One possibility is that, instead of paying the tax, the über-wealthy would strategically give their money away to charities, reducing the tax base. "It seems important to account for the fact that the wealthy (and their tax planners) will inevitably be motivated to limit tax liability," Summers and another professor argued in an opinion piece in the Washington Post

Larry and the rest of us need to read the NYT oped and understand that low revenue is the point. Of course, Saez and Zucman could be more consistent about that.

The prevalence of non-profits as a tax-avoidance device, and their increasingly political nature, is a topic worth exploring. There is a reason every billionaire and sports star has a charity, that among other things employs his or her relatives and associates.

Gerald Auten and David Spilinter's analysis is an important recent piece in the data discussion.

"Top income share estimates based only on individual tax returns, such as Piketty and Saez (2003), are biased by tax-base changes, major social changes, and missing income sources.... Our results suggest that top income shares are lower than other tax-based estimates, and since the early 1960s, increasing government transfers and tax progressivity resulted in little change in after-tax top income shares."

Chris Edwards passed along a number of good links. Like me, Chris is worried about cronyism, and has good opeds  here and here  acknowledging that "the democrats are partially right." He points to the logical fallacy though -- just because some people earned money this way does not mean that all rich people did. And, we can agree on the disease but disagree on the treatment. If a government running a complex tax system open to cronyism is the problem, it does not follow that more government running an even more complex tax system is the answer. Chris also has a nice analysis of the wealth and capital income taxes and Alan Reynolds on tax elasticities

Update: Thanks to commenters and correspondents who fixed some little errors.

A good friend passes on a lovely quip:  "If ever there was an example of policy-based evidence-making, the case for the wealth tax is it."

Wealth and Taxes, Part IV

(This is Part IV of a series. Part III, and Part V. which has the punchline.  See the overview for a summary.)

The Wealth Tax.

So, if arguing about the ill-defined and ill-measured distribution of wealth lies in service of the wealth tax, what is the question to which the wealth tax is an answer?

Revenue and Redistribution -- good and bad taxes

Preamble: Economists have no real professional expertise to object to redistribution, or argue for it. Swallow hard, you may not like it for political, moral or other reasons -- or you may be all for it for those reasons -- but admit economists economists have no special insights to the right amount of redistribution. Economics has one analysis to offer the world: incentives. (OK, and equilibrium.) If it were possible to take money from A and give it to B without creating any adverse incentives, we have no special standing to cheer or to object. Economics can tell us something about tax rates, but not much about taxes. 

Thus the theory of optimal taxation is straightforward: how can the government raise a given tax revenue while generating the least perverse disincentives? The theory of optimal redistribution offers an additional wrinkle: how can the government give money away while generating the least perverse disincentives to recipients as well as payers?