Category: Equitablog

Must-read: Justin Fox: “Vanguard’s Low Blow”

Posted on by Brad DeLong

Justin Fox: Vanguard’s Low Blow: “Vanguard tax lawyer turned whistle-blower David Danon and his hired expert, University of Michigan law professor Reuven S. Avi-Yonah…

… are… reasoning… [that] Vanguard is cheating state and federal tax authorities by charging its customers much less than other fund companies do. Which is exactly as bonkers as it sounds…. My Bloomberg View colleague Matt Levine has dubbed this ‘the faked moon landing of financial news stories, except that it might be true.’ Danon collected a $117,000 whistle-blower bounty in Texas in November, meaning that Vanguard paid the state at least $2.3 million. It’s possible that Vanguard’s payment had nothing to do with the fee issue–a company spokesman told Bloomberg’s Jesse Drucker that Danon’s arguments didn’t come up in the company’s discussions with state tax authorities…. At almost every mutual-fund group other than Vanguard, the management company is out to make a profit, so charging too-low fees isn’t really an issue. But at Vanguard, the funds… own the management company, and expect it to keep fees as low as possible. Why the difference? A little history is in order, in part because it shows that Vanguard isn’t so much a weird outlier as a worthy carrier of the mutual-fund tradition….

Vanguard is run on behalf of its customers, who also happen to be its owners. It has revolutionized the money-management business, putting pressure on competitors to lower fees…. It’s a virtuous cycle that has both changed investing for the better and brought the mutual-fund industry back closer to its roots. If the IRS or the courts decide to go after Vanguard for its frugality, it would amount to throwing all this into reverse…. Saying that competition on the basis of price shouldn’t be allowed… sounds awfully un-American.

Giving credit to the unemployed

Posted on by David Hudson
In this photo taken Wednesday, June 10, 2015, Job seekers attend a job fair in Sunrise, Florida, June 10, 2015. (AP Photo/Alan Diaz)

Losing your job sucks. Outside of the psychological strain and the absence of something to do during the day, you’ve lost what is presumably your primary source of income. And somehow you have to make up the difference between your now-zero income and the cost of paying your bills and buying everyday necessities. Often, the response to such a problem is private credit, through increased credit card use or taking out a loan against the value of your house.

Credit can help an unemployed worker ride out their lack of a job until they find a new one. But what if the worker had access to more credit? How would that affect their job hunt?

The effect of extending credit to unemployed workers is at the heart of a paper by economists Kyle Herkenhoff of the University of Minnesota, Gordon Phillips of the University of Southern California, and Ethan Cohen-Cole of Econ One Research. The three economists look at how increasing an unemployed worker’s credit limits affects both the duration of their job search and their earnings after they find a job. Essentially, they’re trying to figure out how increasing the amount of money an unemployed worker can borrow changes how quickly they’ll find a job and what kind of job they’ll take.

First, a few details on the data the economists are using. They are focusing on the effect of increasing credit limits on the job hunts of unemployed workers who have mortgages. They do this because their empirical technique relies on regional variation in housing price growth and the workers’ ability to borrow against a home as the way of teasing out the independent effect of more credit (instead of measuring the effect of other factors like changes in labor demand that are correlated with credit and job search). Furthermore, they also look only at workers who lost their job due to a layoff. So this limits the applicability of the findings to all unemployed workers just a bit.

The economists find that increasing an unemployed worker’s credit limit extends the amount of time that the worker searches for a job, but it also increases the worker’s income at the next job they have. Specifically, a credit limit increase equal to 10 percent of the worker’s previous earnings extends the worker’s job hunt by about two to seven days on average, and increases the worker’s earnings at their new job by 0.5 percent to 1.5 percent compared to their previous job.

Simply put, access to more credit lets workers take more time to look for a job and then find a seemingly better match. That’s certainly good news for unemployed workers who can get access to more credit—but that’s not always feasible. There’s good evidence that during the Great Recession, increasing credit flowed mostly to borrowers who already had good credit. So a laid-off worker with a low credit score likely won’t be as able to use credit to take more time to find a better job as a laid-off worker with higher credit. And the specific mechanism that Herkenhoff, Phillips, and Cohen-Cole look at is dependent upon the worker owning a home in the first place.

But credit isn’t the only mechanism that can help workers take more time to find a job. There’s also the unemployment insurance system. And the three economists argue that the effects of increasing the level of unemployment benefits are very similar to those from extended credit: a longer but better job search. The key difference, however, is that the effects of unemployment insurance are much stronger—between two and four times as strong, according to their read of the literature. So while private credit can be very helpful in helping an unemployed worker search for a job, public benefits appear to help quite a bit more.

Today’s economic history: John Law in Venice

Posted on by Brad DeLong

Economista Dentata: John Law in Venice: “John Law, like all the best people…

…spent some time in Venice (he actually died there in 1729). Being John Law, of course he ended up playing with money… (and not just in the Ridotto):

He would sit behind a table, at his elbow a pile of coins worth 10,000 gold pistoles. Law knew that many tourists, especially from France or England, would not be able to resist the temptation to gamble with him, so that they could boast of this fact when they returned home. He extended an open invitation to all-comers: for an outlay of one gold pistole, he was willing to gamble his entire 10,000, if his opponent could roll six dice and get each one to come up a six.

Well worth a bet, they thought, even at odds of 10,000:1–and one by one the extra gold pistoles came rolling in.  (Law was well aware that the real odds were in fact an even more unlikely 46,656:1).

From ‘The Spirit of Venice’ by Paul Strathern p. 306

Why it makes sense to look at nominal wage growth right now

Posted on by Bridget Ansel
The Federal Reserve Building on Constitution Avenue in Washington. (AP Photo/J. Scott Applewhite, file)

How’s U.S. wage growth doing these days? According to the January data from the U.S. Bureau of Labor Statistics, average nominal wage growth for all U.S. workers grew at a 2.5 percent clip over the past year. Given that a decent target for healthy nominal wage growth is between 3.5 percent and 4 percent, current wage growth seems quite subpar.

Of course, when a figure is in nominal terms, that means it hasn’t been adjusted for inflation. Fudging the data a bit—because we don’t have data for January 2016 yet—inflation from December 2014 to December 2015 was 0.66 percent as measured by the Consumer Price Index. That means real (or inflation-adjusted) wage growth over the past year was about 1.8 percent. Seeing as how a healthy level of real wage growth is about 2 percent, current wage growth now seems to be pretty much on target.

So, which statistic is a better judge of labor market performance? Is wage growth subpar, or is it on target?

Most of the time when looking at wage growth, we want to focus on real, inflation-adjusted wage growth—because we don’t know how much more goods and services higher wages can buy without accounting for inflation. Nominal wage growth doesn’t mean much, in terms of boosting the purchasing power and well-being of workers, if inflation eats away at the gains. But let’s remember that inflation-adjusted wage growth is just the difference between nominal wage growth and inflation. Two percent nominal wage growth and no inflation gets you the same amount of real wage growth as 4 percent nominal wage growth and 2 percent inflation.

So why should we think that nominal wage growth is important? Well, think about the last time you asked for a raise or a new salary in inflation-adjusted terms. More likely than not, you’ve never done that. A wage rate or salary gets negotiated depending on a number of factors—and in the short term, the amount of labor market slack is a very large factor. But because most worker’s salaries are not currently indexed to inflation, compensation doesn’t get pumped up or down depending upon the amount of inflation that actually happens over the course of the year.

When you and your employer negotiate over pay, everything is set in nominal terms. Now, you both may have inflation in the back of your head as you negotiate, but you typically wouldn’t ask for a 2.6 percent raise based on last year’s CPI-U. Imagine the extra haggling over what inflation index you’d use! Instead you negotiate with your expectation of future inflation in mind.

That’s why the target for nominal wage growth accounts for the level of inflation we’d expect in a healthy economy: 2 percent, which is the Federal Reserve’s target. If you add the expected longer-run trend in labor productivity (1.5 percent to 2 percent), then you get a wage growth rate consistent with a stable share of income going to labor: 3.5 percent to 4 percent.

And while inflation may be closer to zero right now than the Federal Reserve’s 2 percent target, we’re not so sure how much longer that will be true. A big chunk of the low levels of inflation in the United States right now is due to the massive decline in the price of oil. The drop in oil prices is definitely a gain for the increased purchasing power of workers, but this increase in real wage growth doesn’t mean the labor market suddenly got stronger.

And what if inflation does stay lower permanently, so that workers and employers expect, say, 0.5 percent annual inflation? At first, this is great news for wage earners: You’re getting nominal wage growth of 2.5 percent and inflation is 0.5 percent, so real wages are going up 2 percent. But eventually this information is going to trickle into wage negotiations and push down the nominal wage growth consistent with previous negotiations. Your employer may think, “I would have given him a 3.5 percent raise back when inflation was 2 percent, but now that inflation is 0.5 percent his raise is going to be 2 percent.” Your real wage increase for the next year—assuming inflation stays at its new 0.5 percent annual rate—is 1.5 percent. And this process will continue over the years until the new level of inflation gets fully processed. (Josh Bivens of the Economic Policy Institute makes a similar point here.)

So here are the options: Either near-zero inflation is a transitory problem that is temporarily masking a weak labor market, or lower inflation expectations will eventually cause nominal wages to also decline, meaning the stronger real wage gains are illusionary. The stronger real wage gains of the past year or so are nice, but we shouldn’t act like they are going to stick around forever

Must-read: Richard Mayhew: “ESI, Stability and Cost”

Posted on by Brad DeLong

Must-Read: Richard Mayhew: ESI, Stability and Cost: “Kevin Drum is highlighting a point I’ve made before…

…One of the big reasons for the slow growth in Exchange enrollment is that employer sponsored insurance (ESI) has not collapsed. The Congressional Budget Office had projected for years that millions of people would lose their ESI and go on Exchange.  That did not happen: “After four years of private coverage hovering around 61 percent of the population, it jumped up to 66 percent within the space of a single year.” Was this due to the economic recovery? Probably a bit of it. But the economy has been puttering along at about the same pace ever since 2012. The only thing that changed in the fourth quarter of 2013 was the introduction of Obamacare….”

It is not always preferable to have someone on ESI rather than on an Exchange policy or Medicare or Medicaid or CHIP…. ESI is seen as part of the background status quo, so when Mid-Size Motors switches coverage from Aetna to Cigna to save $2.32 per covered life per month, that is just HR doing their thing. It is less disruptive but it is not uniformly better.  If it was uniformly better, the ACA would have just been massive subsidies to employers to provider coverage with a hard employer mandate (see 1993 Clintoncare) and some type of safety net for people out of the work force.  We did not go down that route…. ESI… is good insurance for people who are the least likely to need it…. ESI is not an unmitigated success story on any metric is that ESI is expensive…. It is a good in that higher ESI is less disruptive of a change than an ESI dump but it comes at the cost of giving people expensive and potentially not too usable coverage.

Must-read: Michael E. Martinez et al.: “Health Insurance Coverage: Early Release of Estimates From the National Health Interview Survey”

Posted on by Brad DeLong

Must-Read: Michael E. Martinez et al.: Health Insurance Coverage: Early Release of Estimates From the National Health Interview Survey: “This report includes 2015 estimates for 37 selected states…

…The number of uninsured persons has declined in the past 2 years. In the first 9 months of 2015, 28.8 million persons of all ages (9.1%) were uninsured at the time of interview—7.2 million fewer persons than in 2014 and 16.0 million fewer than in 2013…

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Must-read: Mark Thoma: “Why the Working Class Is Choosing Trump and Sanders”

Posted on by Brad DeLong

Must-Read: Mark Thoma: Why the Working Class Is Choosing Trump and Sanders: “the Center for Budget and Policy Priorities…

…in response to Mitt Romney’s claim during his presidential campaign that many recipients of government help are undeserving found that 91 cents of every dollar spent on entitlement programs goes to ‘the elderly (people 65 and over), the seriously disabled, and members of working households… and [7 of the remaining 9 to] medical care, unemployment insurance benefits (which individuals must have a significant work history to receive), Social Security survivor benefits for the children and spouses of deceased workers, and Social Security benefits for retirees between ages 62 and 64.’… Middle-class households are 60 percent of the US population…. Redistribution… is from the top 20 percent of households to the bottom 20 percent. Too many people have been misled into believing that their problems are the result of a non-existent ‘moocher class.’ Those at the top, those who have benefitted the most from our economic system, have pushed this myth in a successful attempt to reduce their tax burden….

The working class is not asking for income to trickle down to them, and they have been misled about the amount that trickles away from them. All they want is a fair share of what they’ve earned and the opportunity to improve their lives if they work hard and play by the rules. They want the security of knowing they aren’t a pink slip away from living on the streets, that they can find another job easily if they are laid off and, if not, help will be there for them. Working class households want to know that their kids can go to a decent college without being saddled with burdensome debt and that quality=affordable health care is available if they need it. They want to look forward to a better economic future instead of the same struggles they’ve had for years and years, and they want to have confidence that their children will do better than they did. They don’t feel like they are getting any of this…. The two sets of voters–those for Sanders and those for Trump–see different causes and different solutions to the struggles they face, but the goal in both cases is the same… an economy that works for them and a political system that responds to their needs…

The more elastic you are, the less you lose

Posted on by Bridget Ansel
President Obama recently proposed to place a $10-per-barrel tax on imported oil in his Fiscal Year 2017 budget. Many believe that oil producers will pass on the costs of this tax to consumers.

Taxes are tricky. You might think that taxing a good means that the people producing it end up paying the tax, but that’s not always the case. Consider, for example, President Obama’s recent proposal in his Fiscal Year 2017 budget to place a $10-per-barrel tax on imported oil. Many economists and commentators anticipate that the tax incidence will fall mostly on consumers—that is, the people who buy the oil will ultimately pay this new tax, instead of those who produce the oil.

Outside of the specific example of the oil tax, though, let’s look at the concept of incidence and what actually determines who pays.

When you boil it all down, the incidence of a tax or a regulation has to do with elasticity. The question is how readily those buying or selling a good will react to the price being pushed up by a tax (or down by a subsidy). The easiest way to think about these elasticities is by looking at the staples of introductory economics: supply and demand curves. The slopes of those lines are just a way of depicting of the elasticity of supply or demand. A very steep demand curve means that demand for a good or service is highly inelastic, as a change in the price wouldn’t mean that large of a decline in the quantity demanded. In the opposite case, a very flat supply curve would mean very elastic supply. A change in the price would mean a relatively large change in the quantity supplied.

So let’s think about the incidence of a tax on oil. Let’s assume the supply of oil is very inelastic. It’s difficult for oil refineries to ramp up or cut oil production in response to short-term changes in prices. In other words, if the price of oil goes up, then producers aren’t going to be able to change the quantity of oil supplied to the market very much. At the same time, the demand for oil may also be fairly inelastic as well, at least in the short term. Oil is pretty important for many consumers. Just think of how many people need gas to fill up their cars to go to work. The price of gas doesn’t seem to affect how much people drive, meaning the demand for gas does not change much.

But when the government places a tax on gasoline, who will bear the incidence of the tax? It’ll be the more inelastic of either supply or demand. If demand is less elastic (which seems likely), producers, who know that consumers will continue to buy gas in the face of higher price, will shift the price onto them. And the rise of shale oil producers, who are more capable of quickly turning production on and off, means that the short-term supply may become more elastic.

So a quick rule of thumb when it comes to incidence is that the less-elastic factor is going to bear more of the incidence. Former Senate Finance Chair Russell Long said that the problem with tax reform is that everyone says “Don’t tax you, don’t tax me, tax that man behind the tree.” When it comes to tax incidence, it helps to think about how quickly that man can run away.

Must-read: Ada Palmer: “Plato vs. Metaphysics, or How Very Hard it Is to Un-Learn Freud”

Posted on by Brad DeLong

Ada Palmer: Plato vs. Metaphysics, or How Very Hard it Is to Un-Learn Freud: “My students can know intellectually that Plato’s world was full of unfreedom…

…but still feel instinctively that a Republic which offers universal, equal education to all children, of all parents, all races, and both sexes, then gives you an exam to determine the job that will make you most happy in life, is a step toward totalitarianism.  So, well done, Enlightenment, you made a society of young people who really think with freedom and equality as defaults (even if that has the flip side of making it harder for them look past our paper claims of universal equality recognize the real inequalities caused by issues like poverty and race).  As for the Republic, the simple conclusion is that a richer analysis of Plato’s alternate society requires keeping in mind which default society Plato is critiquing, but that is only the first step of engaging with the question of historicity…

Must-reads: February 8, 2016

Posted on by Brad DeLong