Wealth and Taxes, Part III

(This is Part III of a series.  Part II and Part IV   See the overview for a summary. The punchline comes in Part V. )

So, why do we care about the distribution of wealth? -- Especially,  as we learned in part I that wealth is poorly defined and poorly measured, and we learned in part II that much of the distribution of "wealth" reflects higher market prices for the same assets, which do not increase their owner's ability to consume over a lifetime? Why so much anger, even from commenters on this blog?

• Why wealth inequality not income inequality or consumption inequality?

There already has been much ballyhoo about income inequality. Why worry, separately, about wealth inequality? Why worry, especially, given that "wealth" is measured as income / discount rate, so it is income inequality? Well, not really -- it is only certain kinds of income inequality, and different kinds of income get multiplied by different large numbers (1/r). But why do we casre about this particular kind of weighted income inequality rather than broad income inequality?

Why do we worry about wealth inequality or income inequality rather than consumption inequality in the first place?  If you're worried about inequality of lifestyle, inequality of who is using the planet's resources, and so forth, you want to think about consumption inequality.

Wealth and Taxes, part II

(This is a continuation of Wealth and Taxes, part I. Part III follows.  See the overview for a summary. The punchline comes in Part V.)

A second asset pricing perspective helps us to digest "wealth," its distribution, and whether we should care.   

Here is another Smith, Zidar and  Zwick  graph showing the top 0.1% share of wealth (as they define and measure wealth). (Reminder. The game here is to start with selected income streams, then divide them by a rate of return to produce large wealth numbers. $100 income / 0.01 interest rate = $10,000 of wealth.) The "baseline" case capitalizes realized capital gains, which I argued last time was a pretty crazy thing to do. The bottom line treats only dividends. If dividends are properly measured, the value of the firm is the value of dividends only and repurchases are irrelevant.

The graph makes the obvious point that "capitalizing" capital gain "income" is an important assumption to driving up the appearance of wealth inequality.

But it makes a deeper point, my focus today. The top graph is pretty much the graph of the S&P index. This illustrates visually a deeper point:  

• A lot of the rise in "wealth," and "wealth inequality," even properly defined and measured as the market value of net assets, consists of higher market prices for the same underlying physical assets. In turn, higher asset prices stem almost entirely from lower real interest rates and lower risk premiums, not from higher expectations of economic growth. 

This raises a deep "why do we care" question. Suppose Bob owns a company, giving him $100,000 a year income. Bob also spends $100,000 a year. The discount rate is 10%, so his company is worth $1,000,000. The interest rate goes down to 1%, and the stock market booms. Bob's company is now worth $10,000,000. Hooray for Bob!

But wait a minute. Bob still gets $100,000 a year income, and he still spends $100,000 a year. Absolutely nothing has changed for Bob! The value of his company is "paper wealth."

We compare Bob to Sally, who earns $100,000 per year wages and has no assets. The distribution of income and of consumption is entirely flat. But the distribution of wealth was already concentrated: Bob had  $1,000,000 of wealth, because we ignored Sally's human wealth, the present value of her salary. Now wealth inequality is 10 times worse, because we also ignore the higher capitalized value of Sally's human wealth.

But why should we care? Bob and Sally are both marching along unchanged.

Well, you say, I just assumed Bob didn't change consumption. He should sell some stock and go out on a round-the-world private jet tour. Or, what gazillionaires really do, he should start a foundation and give it away. But Bob won't do that for a simple reason. Originally, he wanted to spend $100,000 per year. Originally, if he sold his company for $1,000,000 and invested it at 10%, he could spend $100,000 per year. Now if he sells his company for $10,000,000, he can only invest that at 1% per year so the most he can spend is still $100,000!

People don't want to consume in one big spurt. They want to spread consumption out over their and their heirs lifetimes. When the interest rate goes down, it takes more wealth to finance the same consumption stream.

• Consumption should not respond (much) to increases in wealth generated by lower discount rates for the same cashflows.  

The present value of liabilities -- consumption -- rises just as much as the present value of assets. This is a rather deep point that gets lost all too often in the static Keynesian consumption function thinking about "wealth effects of consumption" that still pervades macroeconomics.

If the rise in asset value is because people expect the income stream to grow a lot in the future, at unchanged discount rates, then indeed Bob is truly more "wealthy" than before. But that is emphatically not the situation of today's market value of wealth in the US, at least on average. If you think internet companies have enormous stock values because their profits will continue to grow at astronomical rates, I have some 1999 dot com stock to sell you.

(A refinement: lower real interest rates do generate a "substitution effect." You should rearrange consumption to be earlier in time rather than later in time. But the central point is that the lower interest rate does not have a "wealth effect." Though the asset is worth more, you cannot consume more in every year than you could before. The original flat consumption path is still just affordable.)

Now there are good questions to be asked about the distribution of consumption, and in particular lifetime consumption. If Bob averages $100,000 consumption over his life, and Sally only $10,000 that's an interesting observation about our society and we might want to think about the economics, politics, justice if you wish and so forth of the situation. But why should we worry about an increase in mark-to-market "wealth" that has no implications for the overall command over resources that "wealthy" people have?

Is this a big effect? Yes. Here is a simple plot of real interest rates, computed as the 10 year bond rate less the university of Michigan inflation survey. It declines from nearly 10% to negative numbers. (If you want to make "wealth distribution" look bad, start capitalizing incomes dividing by zero and then negative numbers!)

In sum, much of the increase in "wealth inequality," to the extent it is there at all, reflects higher market values of the same income flows, and indicates nothing about increases in consumption inequality, or if you prefer "command over resources."

Just why should we carte about wealth inequality?  Obviously, many smart people are very animated by it, including apparently about half the job market candidates on this year's PhD market. What is the question to which wealth inequality is the answer? Stay tuned for part III..

(Note: As a commenter on the last post pointed out, Larry Summers made this point in the excellent
Saez Summers Mankiw debate about wealth and taxes.)

On to Part III

Childbirth and crime

Family formation and crime is the title  of  a very nice new paper by Maxim Massenkoff and Evan K. Rose. (HT Alex Tabarrok at Marginal  Revolution, which also has great commentary.)

The graphs speak for themselves. Go to the paper to look at them all. A few select ones:

Arrests fall by half, starting when mothers know they are pregnant:

(The paper presents  more  accurate but less interpretable event study coefficients.  If you know what that means, go look at  the paper.)

Father's crime drops too:

This decline isn't as steep. But first of all note it's all fathers, married or no, and second third and more kids. Then  look at the huge difference in vertical scale.  Women  go from 3 to 2 economic offenses per 10,000. Men go from 20 to12 economic offenses per 10,000. This is a huge reduction in crime rates.

Summers tweet stream on secular stagnation

Larry Summers has an interesting tweet stream (HT Marginal Revolution) on the state of monetary policy. Much I agree with and find insightful:

Can central banking as we know it be the primary tool of macroeconomic stabilization in the industrial world over the next decade?...There is little room for interest rate cuts..QE and forward guidance have been tried on a substantial scale....It is hard to believe that changing adverbs here and there or altering the timing of press conferences or the mode of presenting projections is consequential...interest rates stuck at zero with no real prospect of escape - is now the confident market expectation in Europe & Japan, with essentially zero or negative yields over a generation....The one thing that was taught as axiomatic to economics students around the world was that monetary authorities could over the long term create as much inflation as they wanted through monetary policy. This proposition is now very much in doubt.

Agreed so far, and well put. "Monetary policy" here means buying government bonds and issuing reserves in return, or lowering short-term interest rates. I am still intrigued by the possibility that a commitment to permanently higher rates might raise inflation, but that's quite speculative.

and later

Limited nominal GDP growth in the face of very low interest rates has been interpreted as evidence simply that the neutral rate has fallen substantially....We believe it is at least equally plausible that the impact of interest rates on aggregate demand has declined sharply, and that the marginal impact falls off as rates fall.  It is even plausible that in some cases interest rate cuts may reduce aggregate demand: because of target saving behavior, reversal rate effects on fin. intermediaries, option effects on irreversible investment, and the arithmetic effect of lower rates on gov’t deficits

Central banks are a lot less powerful than everyone seems to think, and potentially for deep reasons. File this as speculative but very interesting. Larry has many thoughts on why lowering interest rates may be ineffective or unwise.

The question is just how bad this is? The economy is growing, unemployment is at an all time low, inflation is nonexistent, the dollar is strong. Larry and I grew up in the 1970s, and monetary affairs can be a lot worse.

Yes, the worry is how much the Fed can "stimulate" in the next recession. But it is not obvious to me that recessions come from somewhere else and are much mitigated by lowering short term rates as "stimulus." Many postwar recessions were induced by the Fed, and the Great Depression was made much worse by the Fed. Perhaps it is enough for the Fed simply not to screw up -- do its supervisory job of enforcing capital standards in booms (please, at last!) do its lender of last resort job in financial crises, and don't make matters worse.

But how bad is it now? Here Larry and I part company. Larry is, surprisingly to me, still pushing "secular stagnation"

Call it the black hole problem, secular stagnation, or Japanification, this set of issues should be what central banks are worrying about...We have come to agree w/ the point long stressed by Post Keynesian economists & recently emphasized by Palley that the role of specific frictions in economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand. 

The right issue for macroeconomists to be focused on is assuring adequate aggregate demand.  

My jaw drops.

The unemployment rate is 3.9%, lower than it has ever been in a half century. It fell faster after about 2014 than in the last two recessions.

Labor force participation is trending back up.

Wages are rising faster and faster, especially for less skilled and education educated workers.

 There are 8 million job openings in the US.

Why in the world are we talking about "lack of demand?

Inflation, and history

Phil Gramm and John Early have an excellent WSJ oped on inflation measurement.

Many conventional inflation measures are  overstated by around 1% per year, because they don't capture quality change well. When the iPhone 22 comes out, and costs (say) the same as the iPhone 21, that looks like there is no inflation. But the iPhone 22 has dozens of new features, so you're really getting "more phone," and there is deflation. Think of all the things like mapping that are now free. It's not just tech. Houses are bigger and better, cars are much better and safer, and lots of services are now free

No price index takes account of the fact that each month more than twice as many people get medical advice from WebMD as visit the doctor’s office in America. 

The people who make price indices try hard to account for quality, but the result is still biased.

Now for many uses we don't get too upset about this, just as a clock that's always 5 minutes fast is still useful. In particular, for spotting trends in inflation, is it rising or falling, a steady 1% bias doesn't make much difference.

Where it does make a big difference is when you cumulate inflation over a long period of time. We  do that in the politically charged question, is the average American better off now than his or her parents were in 1975, and if so how much? Now whether 1% per year times 44 years is more inflation or better stuff matters a lot.

When corrected for documented price overstatements, real average hourly earnings from 1975 to 2017 are shown to have risen some 52%, not 6%—an additional $6.77 an hour. Real median household income increased 68%, not 21%—$17,060 more annually. 

And published poverty incidence fell by almost half. Combined with the 67% drop in poverty that comes from accounting for all government transfers, poverty incidence sank from 12.3% to about 2%. 

In the political debate over the fate of the "middle class" these are huge differences. The mantra-repeated narrative that the "middle class" hasn't advanced at  all  since the 1970s is simply not true. (Quotes because I reject the idea that we are a class society,  and hence the use of this word.)

Refreshing YIMBY at NYT

Farhad Manjoo writes an excellent YIMBY (yes in my back yard) essay in the New York Times, remarkably placing the blame squarely where it belongs -- progressive politics.

Across my home state [California], traffic and transportation is a developing-world nightmare. Child care and education seem impossible for all but the wealthiest. The problems of affordable housing and homelessness have surpassed all superlatives — what was a crisis is now an emergency that feels like a dystopian showcase of American inequality. 

Just look at San Francisco, Nancy Pelosi’s city. One of every 11,600 residents is a billionaire, and the annual household income necessary to buy a median-priced home now tops $320,000. Yet the streets there are a plague of garbage and needles and feces, and every morning brings fresh horror stories from a “Black Mirror” hellscape: Homeless veterans are surviving on an economy of trash from billionaires’ mansions. Wealthy homeowners are crowdfunding a legal effort arguing that a proposed homeless shelter is an environmental hazard. A public-school teacher suffering from cancer is forced to pay for her own substitute. 

At every level of government, our representatives, nearly all of them Democrats, prove inadequate and unresponsive to the challenges at hand. Witness last week’s embarrassment, when California lawmakers used a sketchy parliamentary maneuver to knife Senate Bill 50, an ambitious effort to undo restrictive local zoning rules and increase the supply of housing.

He notices the same hypocrisy that struck me walking past the "all are welcome here" signs in Palo Alto:

Then there is the refusal on the part of wealthy progressives to live by the values they profess to support at the national level. Creating dense, economically and socially diverse urban environments ought to be a paramount goal of progressivism... Urban areas are the most environmentally friendly way we know of housing lots of people. We can’t solve the climate crisis without vastly improving public transportation and increasing urban density. ... 

Yet where progressives argue for openness and inclusion as a cudgel against President Trump, they abandon it on Nob Hill and in Beverly Hills. This explains the opposition to SB 50, which aimed to address the housing shortage in a very straightforward way: by building more housing. ... 

Reading opposition to SB 50 and other efforts at increasing density, I’m struck by an unsettling thought: What Republicans want to do with I.C.E. and border walls, wealthy progressive Democrats are doing with zoning and Nimbyism. Preserving “local character,” maintaining “local control,” keeping housing scarce and inaccessible — the goals of both sides are really the same: to keep people out. 

“We’re saying we welcome immigration, we welcome refugees, we welcome outsiders — but you’ve got to have a $2 million entrance fee to live here, otherwise you can use this part of a sidewalk for a tent,” said Brian Hanlon, president of the pro-density group California Yimby. 

It's an obvious point. But it's great to hear this point in the New York Times. An internal reflection on hypocrisy is much more effective than an outside charge.

I don't agree with everything. He starts with a good point,

One continuing tragedy is the decimation of local media and the rise of nationalized politics in its place.

Yes, everyone here in California is so consumed with Trump Apolexy that they don't even notice what the city council is doing. But Manjoo chalks the fundamental problem up to larger representation for rural states in the Senate. Hmm. If the same people who vote for San Francisco zoning have more power to push their agenda on the whole country, I don't see how that makes it better.

Still I see hope. California is a one party state, and the one party is slowly waking up to the fact that it must govern too. Slogans about the great progressive future are fine in opposition, but once you've been in total charge for a while, you do start to own it.  After trying everything else, California is slowly waking up to the fact that we have found the problem and it is us. Subsidies, vouchers, "affordable housing" mandates will never make a dent. Just Let Them Build some housing. It took Nixon to go to China. I was very happy to see the Obama administration recognize the havoc caused by occupational licensing restrictions. The YIMBY self-reflection is not over yet. 

Clemens on minimum wage

Jeff Clemens offers a "roadmap for navigating recent research" on minimum wages in a nice CATO policy analysis.  A review and a doubt.

He discusses the recent claims that minimum wages don't hurt low-skilled people. This is an impressive and readable account of a vast literature. It's not as easy as it seems to evaluate cause and effect in economics.  Evidence from small increases in the minimum wage over short time intervals in some locations in good economic times may not tell you the effects of large increases over longer time intervals in all locations in bad economic times.

The "new conventional wisdom," of small effects, Jeff reports, ignores a lot of the more recent work, and especially work that  uses "data from individual-level administrative records" rather than "aggregate data and survey data," work that runs "experiments whenever possible," and work that "transparently analyzes compact historical episodes in the U.S. experience" (P. 8)

Two Videos

My Hoover colleague Russ Roberts just finished a nice video on inequality:

Among other takeaways, he stresses that the people who were rich in 1980 are not the same people or even families who are rich now. It is not true that "the rich got richer." He also tracks individuals through time, and poor individuals got richer to.  There is a lot more economic mobility in the US than the standard talking points.

The video is part of Hoover's Policy Ed initiative, and comes with lots of background information. I'll be curious to hear your comments.

A few months ago I went to the Friedberg Economic Institute to give an evolving talk I call "Free to grow" bringing together various themes of this blog and other writing. It's not nearly as polished as Russ's, and I'm still struggling to keep it under 10 hours!

(Click here to see the video.) The Friedberg Institute is a nascent free-market oriented organization in Israel. It mostly sponsors talks and classes for undergraduates, and for alumni of their program. As a result it is forming a club of sorts of talented and interesting young Israelis interested in economic freedom. If you're in Israel, check it out, and if you're invited to talk there, accept!

Meer On Minimum Wage

David Henderson posts a thoughtful draft op-ed by Jonathan Meer on minimum wages. Two talents of  great economists are to recognize that averages hide big differences among people, and to imagine all the avenues of substitution and unintended effects of a regulation. The oped excels:

Substitution:

when the minimum wage is raised, employers offset increased labor costs by reducing benefits like the generosity of health insurance. Other benefits, like free parking or flexibility in scheduling, are more difficult to measure but are also likely to be cut back. Employers will likely expect more work effort when they are forced to pay more, changing the nature of jobs. And in the longer run, economists have found that employers shift towards automation and expecting customers to do more things themselves– reducing job growth in ways that aren’t always obvious. This damage takes time to be seen, which is one reason minimum wage hikes, like rent control, often seem appealing. 

Who gets jobs?

When debate focuses on the total number of jobs lost or gained, it hides this potentially nasty distribution of the benefits: a recent college graduate with a barista job may get a few more dollars an hour, but the high school dropout finds it harder to get and keep a job. ...

The teenage children of well-off families, earning money to buy video games, are treated the same as single moms struggling to get by. When wages are set at an artificially high rate, why should an employer take a risk on the single mother who needs the occasional shift off to take her kids to the doctor? The kid from a disadvantaged background who needs some direction on how to treat customers appropriately? Or the recently released felon trying to work his way back into the community? Why should employers bother with them when there are plenty of lower-risk people who are willing to work at those artificially high wages? 

Assorted comments, especially to dispel the usual you-just-don't-care-you-want-profits-for-big-business calumnies:

It will get much worse in the next recession...Those at the margins of the workforce will be left further behind. Low-wage jobs aren’t easy, don’t pay well, and are rarely fun. But not being able to find work at all is far worse.

Despite the lowest unemployment rates in decades, only 39% of adults without a high school degree had a full-time job in 2018 – and among young African-Americans dropouts, it’s a shocking 26%. It’s hard to believe that the best way to help them find work and start climbing the job ladder is to put the first rung out of reach, making it difficult for them to find work and driving them to illegal employment with few protections.

 We should never minimize the struggles of low-income families to get ahead. But good intentions are no substitute for good policy. Minimum wage proponents mean well, but the unintended consequences hurt the worst-off the most.

Jonathan isn't just making this up as us bloggers tend to do. He points to "The Minimum Wage, Fringe Benefits, and Worker Welfare, with Jeffrey Clemens and Lisa B. Kahn

...state-level minimum wage changes decreased the likelihood that individuals report having employer-sponsored health insurance. Effects are largest among workers in very low-paying occupations, 

and Dropouts Need Not Apply: The Minimum Wage and Skill Upgrading

workers employed in low-paying jobs are older and less likely to be high school dropouts following a minimum wage hike.... job ads in low-wage occupations are more likely to require a high school diploma following a minimum wage hike,

Related, Zachary S. Fone, Joseph J. Sabia, Resul Cesur find exactly the predicted substitution into criminal activity

find that raising the minimum wage increases property crime arrests among those ages 16-to-24, with an estimated elasticity of 0.2. This result is strongest in counties with over 100,000 residents and persists when we use longitudinal data to isolate workers for whom minimum wages bind. Our estimates suggest that a $15 Federal minimum wage could generate criminal externality costs of nearly $2.4 billion. 

Hat tip to David Henderson, who posted the draft oped and a link to the excellent Jonathan Meer - James Galbraith debate, and to the indefatigable Marginal Revolution. I saw an early draft of the oped, and hoped Meer would be able to publish it, at least somewhere like WSJ. It's not too late!

Update: 

Jonathan passed on this tidbit from Obenauer & von der Nienburg, “Effect of Minimum-Wage Determinations in Oregon,” July 1915, yes 1915

“The belief was very prevalent among store women that the minimum wage had wrought only harm to them as a whole. The experienced women contended that formerly they had gotten through the day without any hurry or strain. If it was necessary to work a few minutes overtime, they did so willingly. Now, they said, they are under constant pressure from their supervisors to work harder; they are told the sales of their departments must increase to make up for the extra amount the firm must pay in wages.”

Plus ça change...

Overall, it's a shame that economists have bought the popular discourse that all that matters are "jobs," as if it were 1933, not the vast range of the terms of employment -- how hard you have to work, hours, tasks, flexibility, side benefits, overtime, and so forth.

Economists and taxes

My last post on taxes continued the question, who bears the burden of the corporate tax? Will a reduction in corporate taxes benefit stockholders or workers? It was a fun technical discussion.

But the whole time I want to scream: That is the wrong question! And the public economists job should be to scream from the rafters, that is the wrong question!  By just accepting the question, we are doomed to bad answers.

The public, and politicians, analyze taxes entirely through the lens of who gains and who loses. Income redistribution, yes, but also redistribution from renters to homeowners, married to unmarried, young to old, city dwellers to farmers, Texans to Californians, and so on. The political and popular discussion is about taxES, and who pays what.

Economists serve best when they offer thoughts outside the standard left-right partisan divide. Our first function should be always to remind people that marginal tax rates matter to the economy not taxes. 

Our second insight is always to analyze things comprehensively. The Federal income tax is not what counts, the entire wedge between work and consumption matters. Whether the corporate tax is progressive or not does not matter, whether the overall tax code is progressive (plus the overall spending code, and forced cross-subsidy code!) matters.   Don't tax wine over beer to redistribute; tax goods evenly and achieve progressivity through a progressive income (or better, consumption) tax, or spend money on programs to help people whose distress is correlated (imperfectly) with beer drinking.

Economists may feel their moral sentiments about redistribution are really important. But we have little professional reason to argue our feelings are better than anyone else's. What we can argue is, if you'r going to do more or less redistribution, do it efficiently and comprehensively.

In this context, the current tax reform proposal, and its instant dismissal from self-identified Democratic economists, echoing political rhetoric, is a deep disappointment.

The economists' tax reform starts with a detailed breakdown by income. (I'm caving to political reality that our nation is obsessed with income, not more meaningful measures of economic advantage and disadvantage.) Then, we create a tax reform in which each group pays the same amount (ideally, bears the same burden), but trades lower marginal rates for fewer deductions, exemptions, and for the reduction or elimination of taxes that either highly distort economic activity or lead to lots of inefficient avoidance  (corporate, rates of return, estate).

In short, we aim for a revenue-neutral, redistribution-neutral, reform. We recognize that eventually tax rates must be high enough to cover spending. There isn't a big need to argue over Laffer effects. Even if scored as statically revenue neutral, when the economy booms, revenue flows in, and we have paid off the debt we can start lowering rates. We recognize that if the structure if the tax reform is fixed, we can later continue to argue over the right amount of redistribution.

1986 came close. It wasn't perfect. But at least the rhetoric was this, and politicians explained this goal to the public. You will pay the same taxes, but at lower rates for fewer deductions, and the economy will grow. And lo, it did.

For thirty-one years, we have waited to finish the job. As the tax code grew more complex, with higher statutory rates and more deductions, we waited to redo the job. Reform proposal came and went, with at least a nod to this amount of economic sense.

But no more. Now tax policy is all redistribution all the time. Democratic politicians have decided that their mantra is "tax cuts for the rich." Well, a slogan is a slogan. More sadly, self-identified democratic economists echo this mantra, and little other. Anytime you're arguing one side's talking point or another, you're doing little to illuminate a discussion.

Each provision is examined in isolation for its redistributive impact. It's profoundly hypocritical of course.  Tax deductions are indeed a "tax cut for the rich" since people in the 40% marginal bracket who itemize get a lot more than Joe and Jane down in the lower brackets. But you hear either silence, or pretzel logic defense, such as the New York Times defense of the profoundly regressive deduction for state and local taxes.

I was disappointed at both the rhetoric and the small progress of the administration's proposal's to date. Yes, cutting the corporate rate is a good idea. But they don't even try to argue for marginal rate reductions or incentives. The buzzword is to give "tax cuts to help the middle class," which the left can then argue is a "lie" or not. Once you fall for redistributionist rhetoric, once you say that tax policy is all about giving the right people more and the wrong people less money, I think the hope for a tax reform that actually gets the economy going is dim.

The holy trinity was off the table from the start -- home mortgage interest deduction, charitable deduction, and employer-provided health deduction. The fourth horseman of the apocalypse, the deduction for state  and local taxes, is in danger. (Sorry for mixing metaphors!) This is like a wayward husband saying, "sure, I'll clean up my act. However, the drinking, gambling, and smoking are off the table." The corporate tax reduction does not seem to be coming with a serious cleanup of the thousands of deductions and extenders, each catnip to the lobbyists who keep them in place.

The political challenge for a reform is to say to each group, "you're going to give up your deduction, yes even interest on future home mortgages. But, your rates will go down so much that you will end up paying no more overall, and as the economy grows you will pay less. I want your help holding the fort against those who will demand their deductions and subsidies." That's a deal that pretty much held together in 1986. But if we go into the negotiation saying "oh, and by the way the big three are getting theirs unscathed," and "therefore really big rate reductions are off the table," then the hope of putting that coalition together is gone. It's  a free for all, call your congressperson and make sure you keep yours.

The bottom line: I support the current tax proposal, as incomplete and flawed as it is. It is a step in the right direction. We get the corporate tax rates down to those common in that low-tax free-market nirvana, Europe. It is not, however, 1986 on its own.

I do not support the rhetoric. "Tax cuts" do not work absent spending cuts. Cuts in distorting marginal tax rates matter. The people in charge must surely understand this, so the choice to market it as "tax cuts for the middle class" represents, I think, an unwise rhetorical choice.  The American people are smart enough to understand this, and playing redistribution, bidding for support with handouts, is not a winning game.

Moreover, the sense I have from talking to people, less enshrined in economic theory, is that massive tax complexity and uncertainty are larger drags on growth than a stable simple but high tax rate would be. I see "simplification" in the rhetoric, but no substantial simplification in the body of the proposal. It leaves most of the "finish 1986" job undone, and unless magic happens on entitlement reform, this tax bill will be undone soon as the deficit widens. If it is all we get, and if it is passed as Obamacare was passed, with no votes from the other party, it will not give the sense of permanence necessary to induce a lot of investment and growth.

It needs to be a first step, not this generation's tax reform for the next 31 years. I understand the politics. Republican leadership needs to do something. If Democrats will unite in "resistance" to a bill celebrating mom and apple pie, they need to do something on their own. If they do something, and look like winners, they can get support to do more. But it must be that first step. And even so, I would have hoped for some more courage in the first step. Enshrining the triplet of deductions without  a fight, not even mentioning marginal rates, makes it ever harder to remove them in a second step.

And I wish I were hearing a lot of this, and not just echoing the political line "tax cuts for the rich," from top economists more critical of the proposals.

Automation and jobs

I am often asked to opine about whether automation will destroy all the jobs. Yes, we talk about tractors, which brought farm employment from something like 70% of the country at the beginning of the 20th century to about 3% today. And cars, which put the horse drivers out of business. And trains, which put the canal boats out of business.

A more recent case occurred to me. This is what offices looked like in the 1950s and 1960s:

Embed from Getty Images

Typing Pool. Source: Getty Images

This is a "typing pool." There used to be basketball-court sized rooms that looked like this, all over the place, staffed almost exclusively by  women.

Then along came the copier -- many of these women are copying documents by typing them over again with a few sheets of carbon paper -- the fax machine, the word processor, the PC. And that's just typing. Accounting involved similar roomfuls of women with adding machines. Filing disappeared. Roomfuls of women used to operate telephone switchboards, now all automated.

This memory lives on in the architecture of universities. All the old buildings have empty hutches for secretaries.

If you are prognosticating in about 1970, and someone asks, "what will happen now that women want to join the workforce, but office automation is going to destroy all their jobs?" It would be a pretty gloomy forecast.

What actually happened: Female labor force increased from 20 million to 75 million. The female participation rate increased from below 35% to 60%. Women's wages relative to men rose -- they moved in to higher productivity activities than typing the same memo over a hundred times. Businesses expanded. And no, 55 million men are not out on the streets begging for spare change.

Civilian Labor Force Level: Women

Civilian Labor Force Participation Rate: Women

I'm simplifying of course. And surely some people with specific skills -- shorthand, typing without making mistakes, and so on -- who could not retrain didn't do as well as others. But the magnitude of the phenomenon is pretty impressive.

Update. So did women just take all the men's jobs? As MC points out, the male labor force participation rate did decline, from 87.5 to 70.0. That's a big, worrisome decline. But it's 15 percentage points, while the women's increase was 25 percentage points.

But even if women are moving in and men are moving out of employment, that does make the case that you don't just look at who has what jobs now threatened by automation! The typing pool got better jobs.

Please (please!) keep in mind the point here. No, this is not a post about all the ills of the labor market, and "middle class" America, and all the rest. Yes, there are plenty. The narrow point is, will automation mean that all the jobs vanish. In this case, even combined with a large expansion of the people wanting to work, it did not.

Also the male labor force expanded from 45 million to 82 million. So the idea that there is a fixed number of jobs and if women take them men lose them is not true.

Work and incentives.

Ed Glaeser has a thoughtful essay at City Journal, "The War on Work -- and How to End It.''

It is interesting that our political class says it wants more Americans to work. Yet there are few activities as hit by disincentives and regulatory barriers than the simple act of paying another person to do something for you.

With wide range and long historical perspective, Ed points out the slow decline in the fraction of the population working, especially prime-age men.

From 1945 to 1968, only 5 percent of men between the ages of 25 and 54—prime-age males—were out of work. ...As of December 2016, 15.2 percent of prime-age men were jobless  

These are "out of the labor force," not looking for work. We are arguably at a business cycle peak, with a low unemployment rate -- defined as those looking for work.

Joblessness is disproportionately a condition of the poorly educated. While 72 percent of college graduates over age 25 have jobs, only 41 percent of high school dropouts are working. 

Why? I'm not going to restate the whole thoughtful essay but the disincentives caused by safety net programs are a big part of the story:

...Social Security and unemployment insurance,  National disability insurance,  Medicaid and food stamps, housing vouchers... 

These various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work. ... After 1984, though, millions went on the disability rolls. And since disability payments vanish if the disabled person starts earning more than $1,170 per month, the disabled tend to stay disabled. The economists David Autor and Mark Duggan found that the share of adults aged 25–64 receiving disability insurance increased from 2.2 percent in 1985 to 4.1 percent 20 years later.... 

Other social-welfare programs operate in a similar way. Unemployment insurance stops completely when someone gets a job, which may explain why economist Bruce Meyer found that the unemployed tend to find jobs just as their insurance payments run out. Food-stamp and housing-voucher payments drop 30 percent when a recipient’s income rises past a set threshold by just $1. Elementary economics tells us that paying people to be or stay jobless will increase joblessness.

Russ Roberts on Economic Humility

Russ Roberts has an excellent essay, What do economists know? on economic humility. (HT Marginal Revolution)

A journalist once asked me how many jobs NAFTA had created or destroyed. I told him I had no reliable idea. ... 

The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I told him. You just don’t like the answer. 

A lot of professional economists have a different attitude. They will tell you how many jobs will be lost because of an increase in the minimum wage or that an increase in the minimum wage will create jobs. They will tell you how many jobs have been lost because of increased trade with China and the amount that wages fell for workers with a particular level of education because of that trade. They will tell you that inequality lowers health or that trade with China reduces the marriage rate or encourages suicide among manufacturing workers. They will tell you whether smaller classrooms improve test scores and by how much. And they will tell you things that are much more complex — what caused the financial crisis and why its aftermath led to a lower level of employment and by how much.

And Russ continues, with great clarity, to explain just how uncertain all those estimates are.

So what do economists know? As Russ points out, much of these kind of estimates are not really produced by economics

Miserable 21st Century

Nicholas Eberstadt in Commentary, (HT Marginal Revolution) offers a revealing look at what's wrong with "middle" America's stagnation. Read the whole thing, but the following snapshot jumped out at me.

He starts with a review, probably familiar to readers of this blog, of the sharp decline in work rates, even among prime-age men and women.

As of late 2016, the adult work rate in America was still at its lowest level in more than 30 years. To put things another way: If our nation’s work rate today were back up to its start-of-the-century highs, well over 10 million more Americans would currently have paying jobs.

Why are so many not working, not studying for work, and not even looking for work? What is going on in their lives? One answer:

The opioid epidemic of pain pills and heroin that has been ravaging and shortening lives from coast to coast is a new plague for our new century...

According to [Alan Krueger's] work, nearly half of all prime working-age male labor-force dropouts—an army now totaling roughly 7 million men—currently take pain medication on a daily basis.

I think Krueger had a different idea in mind: that they are in pain, indicated by medication, so can't be expected to work. How the explosion in disability jibes with a much safer workplace is an interesting puzzle to that view. Eberstadt has a different interpretation, and the lovely thing about facts is they are facts, not interpretations.

We already knew from other sources (such as BLS “time use” surveys) that the overwhelming majority of the prime-age men in this un-working army generally don’t “do civil society” (charitable work, religious activities, volunteering), or for that matter much in the way of child care or help for others in the home either, despite the abundance of time on their hands. Their routine, instead, typically centers on watching—watching TV, DVDs, Internet, hand-held devices, etc.—and indeed watching for an average of 2,000 hours a year, as if it were a full-time job. But Krueger’s study adds a poignant and immensely sad detail to this portrait of daily life in 21st-century America: In our mind’s eye we can now picture many millions of un-working men in the prime of life, out of work and not looking for jobs, sitting in front of screens—stoned.

Furman on zoning

On this day (Clinton vs. Trump debate) of likely partisan political bloviation, I am delighted to highlight a very nice editorial by Jason Furman, President Obama's CEA chair, on the effects of housing restrictions. A longer speech here. The editorial is in the San Francisco Chronicle, ground zero for housing restriction induced astronomical prices. Furman:

 When certain government policies — like minimum lot sizes, off-street parking requirements, height limits, prohibitions on multifamily housing, or unnecessarily lengthy permitting processes — restrict the supply of housing, fewer units are available and the price rises. On the other hand, more efficient policies can promote availability and affordability of housing, regional economic development, transportation options and socioeconomic diversity...

...barriers to housing development can allow a small number of individuals to enjoy the benefits of living in a community while excluding many others, limiting diversity and economic mobility. 

This upward pressure on house prices may also undermine the market forces that typically determine patterns of housing construction, leading to mismatches between household needs and available housing. 

What's even more praiseworthy is what Furman does not say: "Affordable" housing constructed by taxpayers, or by forcing developers to provide it; rent controls; housing subsidies; bans on the construction of market-rate housing (yes, SF does that); bans on new businesses (yes, Palo Alto does that), and the rest of the standard bay-area responses to our housing problems.  The first few may allow a few lucky low-income people to stay where they are, as long as they remain low-income, but does not allow new people to come chase opportunities. Subsidies that raise demand without raising supply just raise prices more. As in child care or medicine.

Zoning common sense

Kate Kershaw Downing has posted a worthy letter of resignation from the Palo Alto Housing commission, that seems to be going viral.

Palo Alto is absurdly expensive. People who want to come here for jobs can't afford to live anywhere nearby.  What to do about it?

 I have repeatedly made recommendations to the Council to expand the housing supply in Palo Alto so that together with our neighboring cities who are already adding housing, we can start to make a dent in the jobs-housing imbalance that causes housing prices throughout the Bay Area to spiral out of control. Small steps like allowing 2 floors of housing instead of 1 in mixed use developments, enforcing minimum density requirements so that developers build apartments instead of penthouses, legalizing duplexes, easing restrictions on granny units, leveraging the residential parking permit program to experiment with housing for people who don’t want or need two cars, and allowing single-use areas like the Stanford shopping center to add housing on top of shops (or offices), would go a long way in adding desperately needed housing units while maintaining the character of our neighborhoods and preserving historic structures throughout.

Regional price data

Some big news, to me at least: The Bureau of Economic Analysis is now producing "regional price parities" data that allow you to compare the cost of living in one place in the US to another. The BEA news release release is here; coverage from the tax foundation here (HT the always interesting Marginal Revolution). In the past, you could see regional inflation -- changes over time -- but you couldn't compare the level of prices in different places.

The states differ widely. It is in fact as if we live in different countries with different currencies. Hawaii (116.8) vs. Mississippi (86.7) is bigger than paying in dollars vs Euros (118) Yen (times 100, 1.01) and almost as big as pounds (1.30)

NYT on zoning

Conor Dougherty in The New York Times has a good article on zoning laws,

a growing body of economic literature suggests that anti-growth sentiment... is a major factor in creating a stagnant and less equal American economy.

...Unlike past decades, when people of different socioeconomic backgrounds tended to move to similar areas, today, less-skilled workers often go where jobs are scarcer but housing is cheap, instead of heading to places with the most promising job opportunities  according to research by Daniel Shoag, a professor of public policy at Harvard, and Peter Ganong, also of Harvard.

One reason they’re not migrating to places with better job prospects is that rich cities like San Francisco and Seattle have gotten so expensive that working-class people cannot afford to move there. Even if they could, there would not be much point, since whatever they gained in pay would be swallowed up by rent. 

Stop and rejoice. This is, after all, the New York Times, not the Cato Review. One might expect high housing prices to get blamed on developers, greed, or something, and the solution to be government-constructed housing, "affordable" housing mandates, rent controls, low-income housing subsidies (which protect incumbent low-income people, not those who want to move in to get better jobs) and even more restrictions.

No. The Times, the Obama Administration, California Governor Gerry Brown, have figured out that zoning laws are to blame, and they're making social stratification and inequality worse.

Rajan on cash transfers and corruption

Raghu Rajan, who just announced he is stepping down as Governor of the Central Bank of India, gave a very interesting speech, that bears among other things on the question of social programs vs. cash transfers.

A big problem with government provided assistance in India is that the provision is corrupt:

Our [India's] provision of public goods is unfortunately biased against access by the poor. In a number of states, ration shops do not supply what is due, even if one has a ration card – and too many amongst the poor do not have a ration card or a BPL card; Teachers do not show up at schools to teach; The police do not register crimes, or encroachments, especially if committed by the rich and powerful; Public hospitals are not adequately staffed and ostensibly free medicines are not available at the dispensary; …I can go on, but you know the all-too-familiar picture.

Raghu has a thoughtful observation on what keeps this system going:

Syverson on the productivity slowdown

Chad Syverson has an interesting new paper on the sources of the productivity slowdown.

Background to wake you up: Long-term US growth is slowing down. This is a (the!) big important issue in economics (one previous post).  And productivity -- how much each person can produce per hour -- is the only source of long-term growth. We are not vastly better off than our grandparents because we negotiated better wages for hacking at coal with pickaxes.

Why is productivity slowing down? Perhaps we've run out of ideas (Gordon). Perhaps a savings glut and the  zero bound drive secular stagnation lack of demand (Summers). Perhaps the out of control regulatory leviathan is killing growth with a thousand cuts (Cochrane).

Or maybe productivity  isn't declining at all, we're just measuring new products badly (Varian; Silicon Valley). Google maps is free! If so, we are living with undiagnosed but healthy deflation, and real GDP growth is actually doing well.

Chad:

First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies ... Second, estimates... of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown...Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs [internet] would have to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.

An interesting read throughout. 

[Except for that last sentence, a near parody of academic caution!]