Category: Equitablog

Must-Read: Tim Harford: The Real Benefits of Migration

Posted on by Brad DeLong

Must-Read: Tim Harford: The Real Benefits of Migration: “UK Home Secretary Theresa May gave a speech… designed to polarise…. She succeeded…

…One statement… found the spotlight…. (Translation: immigration costs us nothing but we want to reduce it anyway.) Is May’s summary of the evidence correct? Probably not…. But there was a far bigger lacuna… [that] most commentators… missed it…. Migrants… prosper hugely… yet that prosperity hardly ever figures in debates about immigration. This is odd. I would not expect schools to fare well on a cost-benefit analysis if we ignored any gains to the under-18s. Nor would hospitals look like a good investment if we counted only the advantages to non-patients. Yet it seems that migration may still be mildly beneficial even after disqualifying any benefit to the people most likely to gain–the migrants. That is remarkable….

One might make the case that because migrants are foreign nationals, we are entitled to make their welfare a lower priority. My colleague Martin Wolf is one of the few commentators to bother asserting this openly; most simply seem to assume that foreigners count for nothing…. Being open to migration from poor countries is perhaps the best anti-poverty programme that rich countries can offer…. Whether foreigners should count as sentient beings in a British cost-benefit analysis is something I’ll leave to the philosophers….

How real a problem is… brain drain?…. Where developing countries do train large numbers of skilled workers–as with the Philippines, a world centre for nursing and midwifery–they also manage to keep a reasonable number of them at home. And… migrant remittances… [are] three times as much as is sent in official development assistance. Migrant networks can help make trade flow smoothly too. Then there is the simple matter of respecting individual liberties…. If we have gained anything from the harrowing images of desperate refugees, it is an appreciation that they are human. Economic migrants are human too… not pheasants to poach; nor brains to drain.

Noted for Nighttime on October 26, 2015

Posted on by Brad DeLong

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Must-Read: Charles Bean: Causes and Consequences of Persistently Low Interest Rates

Posted on by Brad DeLong

Must-Read: So what is the argument against shifting the monetary-policy target to 4%/year PCE inflation or 6%/year nominal GDP growth again? I mean, Larry Summers and I wrote 23 years ago that the danger of hitting the zero lower bound made it potentially unwise to aim to push inflation much below 5%/year–and that was when we expected both a small equity risk premium–hence Treasury rates not far below the return on physical investment–and not a global savings glut but rather a global savings shortfall:

Charles Bean: Causes and Consequences of Persistently Low Interest Rates: “Demographic developments… the partial integration of China…

…and the associated capital outflows…. a lower propensity to invest… as a result of heightened risk aversion…. Rates should eventually return to more normal levels…. But… the time scale… is highly uncertain and will be influenced by longer-term fiscal and structural policy choices…. With current inflation targets of around 2%, episodes where policy rates are constrained by their lower bound are likely to become more frequent and prolonged… how easy it is in such circumstances to slip into a deflationary trap–and how difficult it can be to escape it….

Must-Read: Martin Wolf: Lunch with the FT: Ben Bernanke

Posted on by Brad DeLong

Must-Read: Martin Wolf: Lunch with the FT: Ben Bernanke: “‘The notion that the Fed has somehow enriched the rich…

…through increasing asset prices doesn’t really hold up…. The Fed basically has returned asset prices… to trend… [and] stock prices are high… because returns are low…. The same people who criticise the Fed for helping the rich also criticise the Fed for hurting savers…. Those two… are inconsistent….

‘Should the Fed not try to support a recovery?… If people are unhappy with the effects of low interest rates, they should pressure Congress… and so have a less unbalanced monetary-fiscal policy mix. This is the fourth or fifth argument against quantitative easing after all the other ones have been proven to be wrong….’ Other critics argue, I note, that the Fed’s intervention prevented the cathartic effects of a proper depression. He… respond[s]… that I have a remarkable ability to keep a straight face while recounting… crazy opinions…. ‘We were quite confident from the beginning there would be no inflation problem…. As for… the Andrew Mellon [US Treasury secretary] argument from the 1930s… certainly among mainstream economists, it has no credibility. A Great Depression is not going to promote innovation, growth and prosperity.’ I cannot disagree, since I also consider such arguments mad….

Does… blame… lie in pre-crisis monetary policy… interest rates… too low… in the early 2000s?… ‘Serious studies that look at it don’t find that to be the case…. Shiller… has a lot of credibility…. The Fed had some complicity… in not constraining the bad mortgage lending… [and] the structural vulnerabilities in the funding markets….’ Thus, lax regulation…. Has the problem been fixed?… ‘It’s an ongoing project…. You can’t hope to identify all the vulnerabilities in advance. And so anything you can do to make the system more resilient is going to be helpful.’… I push a little harder on the costs of financial liberalisation. He agrees that, in light of the economic performance in the 1950s and 1960s, ‘I don’t think you could rule out the possibility that a more repressed financial system would give you a better trade-off of safety and dynamism.’ What about the idea that if the central banks are going to expand their balance sheets so much, it would be more effective just to hand the money directly over to the people rather than operate via asset markets?… A combination of tax cuts and quantitative easing is very close to being the same thing.’ This is theoretically correct, provided the QE is deemed permanent…

Must-Read: Kevin Drum: Red States Spent $2 Billion in 2015 to S—- the Poor

Posted on by Brad DeLong

Must-Read: Nobody is saying anymore that states’ rejecting Medicaid expansion is a way of raising the chances of repealing-and-replacing ObamaCare with something better. Only true dead-enders–cough, Michael F. Cannon–are claiming that Medicaid is ineffective. And more and more evidence piles up that Medicaid expansion lowers rather than raising state-level health spending even in the short run. The remarkable thing is that the anti-Medicaid expansion zombies just keep on going–and it’s not just the poor, it’s the disabled, it’s the elderly whom Medicare copays have made poor, and its the hospitals and doctors and nurses who treat the poor:

Kevin Drum: Red States Spent $2 Billion in 2015 to S—- the Poor: “In 2015… spending by states that refused to expand Medicaid…

…grew by 6.9 percent. That’s pretty close to the historical average. However, spending by states that accepted Medicaid expansion grew by only 3.4 percent. Obamacare may have increased total Medicaid enrollment and spending, but the feds picked up most of the tab. At the state level, it actually reined in the rate of growth…. The states that have refused the expansion are… willing to shell out money just to demonstrate their implacable hatred of Obamacare. How much money? Well, the expansion-refusing states spent $61 billion of their own money on Medicaid in 2014. If that had grown at 3.4 percent instead of 6.9 percent, they would have saved about $2 billion this year… denying health care to the needy and paying about $2 billion for the privilege. Try to comprehend the kind of people who do this….

The residents of every state pay taxes to fund Obamacare, whether they like it or not. Residents of the states that refuse to expand Medicaid are paying… Obamacare taxes… about $20 billion of that is for Medicaid expansion…. So they’re willing to let $20 billion go down a black hole and pay $2 billion extra [a year] in order to prevent Obamacare from helping the needy. It’s hard to fathom, isn’t it?

Noted for Lunchtime on October 26, 2015

Posted on by Brad DeLong

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Must-Read: Matt O’Brien: Europe Just Made It Harder for the Fed to Raise Rates

Posted on by Brad DeLong

Matt O’Brien: Europe Just Made It Harder for the Fed to Raise Rates: “Europe is going to have zero interest rates for a lot longer…

…that is going to make it harder for the United States to stop having them…. The ECB seems set to do something at its December meeting to try to prevent the emerging market slowdown from spilling over into Europe and get inflation moving back up toward its 2 percent target. It that sounds familiar, that’s because it is. Those are the same problems the U.S. has now. But instead of thinking about new ways to stimulate the economy, the Federal Reserve is getting ready to do less. Why? Well, unemployment is half as high here as it is in Europe, so there should be more upward pressure on inflation. Look at that last sentence again, though. That’s a lot of faith to put in one of the most dangerous words in the English language–should–when the cost of being wrong is so high. Indeed, inflation isn’t increasing at all now even though unemployment is down to a pretty normal level….

Consider this: according to Goldman Sachs, just talking about raising rates has already tightened financial conditions as if the Fed had actually raised them around three times. And that was when the ECB was only buying 60 billion euros of bonds a month. It’d be even more of a problem if it was buying more…. If two monetary policies diverge even more in, well, not a wood, we might take the path every other country that has tried to raise rates from zero has traveled by–back to where we started.

Katie Martin: Dovish Mario Draghi sends bond yields to new lows: “Yields on two-year debt now stand below zero for almost every member of the eurozone…

…Investors have been piling into eurozone debt since a press conference on Thursday at which ECB president Mario Draghi suggested further cuts to the deposit rate could be on the way. The deposit rate already stands at minus 0.2 per cent…. The ECB has already been buying an average of €60bn a month since March, mostly in government bonds, and intends to continue that programme until at least September next year. But investors now think the programme could last longer, encompass more instruments or grow in size…. Economists think the euro weakness that would inevitably accompany a fresh bout of easing from the ECB will create headaches for other central banks in the region.
Swedish bank SEB wrote on Friday that the prospect of further easing is ‘a nightmare’ for the Riksbank, which already has interest rates at rock bottom to try and support inflation. Renewed strength in the krona, the flip side of weakness in the euro, would probably depress consumer prices still further.

How tax expenditures distort our understanding of the U.S. tax code

Posted on by Bridget Ansel
Photo of tax payment by GStudio Group, veer.com

There are certainly good reasons to subsidize the adoption of electric cars. And there are certainly a number of ways to effectively push consumers to move into the electric market. But using a tax break originally designed to encourage farmers to invest in large equipment to now encourage people to buy a Tesla Model X probably isn’t one of them. The benefit from this tax break will almost certainly go to the wealthy individuals who were already going to buy these cars in the first place. This story is just an exaggerated example of some of the many problems with the number of loopholes and deductions in the U.S. tax code.

A recent piece by Politico tax reporter Katy O’Donnell details one of the issues with tax deductions: They are a shadow budget because the spending doesn’t show up on the official U.S. budget. Deductions are often called “tax expenditures” because specific tax breaks act very much like government spending. Consider the mortgage interest tax deduction: In practice, the tax break acts like giving money to a taxpayer with a mortgage, with the amount of the payment depending on the mortgage’s size.

Despite acting like spending, tax expenditures aren’t registered on the U.S. federal budget like the rest of spending. So while the rest of the spending in the budget gets voted on every year, most tax expenditures roll on unaccounted for. If you want to see how much the federal government has spent since 1789, for example, that data is easily available and downloadable on the Office of Management and Budget website. Finding the amount of spending through the tax code for just the last two years, however, requires finding a PDF squirreled away on a separate page.

But the general public doesn’t seem to miss the number of loopholes and deductions. Around tax time, looking at the number of potential deductions you might qualify for can be daunting. Or, perhaps, it makes you wonder who exactly is taking advantage of these loopholes. In an opinion piece for Morning Consult, Vanessa Williamson of the Brookings Institution and Andrea Louise Campbell of the Massachusetts Institute of Technology note how a number of people they interviewed about the tax code believed that they were missing out on the benefits of deductions and credits while the rich were raking it in. Interestingly, this is why many of them supported a flat tax. They thought the elimination of loopholes would result in the rich paying a higher share of their income.

These people’s intuitions about the incidence of tax expenditures are correct—the benefits of spending through the tax code go disproportionately to high-income taxpayers. But the overall distributional effects of a flat tax would be overwhelmingly regressive. Tax reform that streamlines these breaks but keeps a progressive structure would end up meeting the criteria of the taxpayers that Williamson and Campbell interviewed.

So not only are tax expenditures inefficient and inequitable, but they are also opaque. They give a misleading picture of the actual amount of federal government spending, and they make taxpayers question the structure of the code itself. The case against tax expenditures only continues to get stronger.

Noted for the Afternoon of October 25, 2015

Posted on by Brad DeLong

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Must-Read: Charles Bean: Causes and Consequences of Persistently Low Interest Rates

Posted on by Brad DeLong

Must-Read: So: On the one hand, risk tolerance is disappointingly and inappropriately low–but should return to normal some day. On the other hand, investors are “reaching for yield” and taking inappropriate risks by crowding into bubbly assets. I cannot be the only person who wants a real model of how this is supposed to work, and real evidence that it is a factor at work, plus a real argument that higher interest rates would exert enough of a curb to pass some reasonable benefit-cost test. The very sharp Gabriel Chodorow-Reich looked for this and did not find it…

Charles Bean: Causes and Consequences of Persistently Low Interest Rates: “Demographic developments… the partial integration of China…

…and the associated capital outflows…. a lower propensity to invest… as a result of heightened risk aversion…. Rates should eventually return to more normal levels…. But… the time scale… is highly uncertain and will be influenced by longer-term fiscal and structural policy choices…. A world of persistently low interest rates may be more prone to generating a leveraged ‘reach for yield’ by investors and speculative asset-price boom-busts. While prudential policies should be the first line of defence against such financial stability risks, their efficacy is by no means assured. In that case, monetary policy may need to come into play as a last line of defence…