Category: Equitablog

Must-Read: Kenneth Arrow: Samuelson Collected

Posted on by Brad DeLong

Must-Read: Kenneth Arrow: Samuelson Collected: “Samuelson has not addressed… the relation between microeconomics and macroeconomics…

…Neoclassical microeconomic equilibrium with fully flexible prices presents a beautiful picture of the mutual articulations of a complex structure, full employment being one of its major elements. What is the relation between this world and either the real world?… If the neoclassical model with full price flexibility were sufficiently unrealistic that stable unemployment equilibrium be possible, then in all likelihood the bulk of the theorems derived by Samuelson, myself, and everyone else from the neoclassical assumptions are also contrafactual. The problem is not resolved by what Samuelson has called “the neoclassical synthesis,” in which it is held that the achievement of full employment requires Keynesian intervention but that neoclassical theory is valid when full employment is reached….

Dramatic historical episodes–most recently the reconversion of the United States from World War II and the postwar European recovery–suggest that an economic mechanism exists which is capable of adaptation to radical shifts in demand and supply conditions. On the other hand, the Great Depression and the problems of developing countries remind us dramatically that something beyond, but including, neoclassical theory is needed…

Must-Read: Robert Shiller: Fraud, Fools, and Financial Markets

Posted on by Brad DeLong

Must-Read: The fact that the sources of win-win value in finance are subtle and second-order–having to do with liquidity, patience, diversification, and incentive alignment–makes phishing for phools much more profitable relative to building relationships with customers and suppliers than in “normal” industries. I am pleased that the… I was going to say Nobel Prize-caliber minds, but looking again at the Economics prize recipients I realize that is not a compliment… extremely-sharp minds of Shiller and Akerlof are thinking of this:

Robert J. Shiller: Fraud, Fools, and Financial Markets: “Because we can be manipulated or deceived or even just passively tempted…

…free markets also persuade us to buy things that are good neither for us nor for society… an important codicil to Smith’s vision… one that George Akerlof and I explore in our new book, Phishing for Phools: The Economics of Manipulation and Deception…. Routine phishing can affect any market, but our most important observations concern financial markets…. Borrowers are lured into unsuitable mortgages; firms are stripped of their assets; accountants mislead investors; financial advisers spin narratives of riches from nowhere; and the media promote extravagant claims. But the losers in the downturns are not just those who have been duped. A chain of additional losses occurs when the inflated assets have been purchased with borrowed money. In that case, bankruptcies and fear of bankruptcy spawn an epidemic of further bankruptcies, reinforcing fear. Then credit dries up and the economy collapses. This vicious downward spiral for business confidence typically features phishes–for example, the victims of Bernard Madoff’s Ponzi scheme–discovered only after the period of irrational exuberance has ended….

We found out many years ago, to the world’s great regret, what happens when a financial epidemic is allowed to run its course. Our analysis indicates that not only are there endemic and natural forces that make the financial system highly volatile; but also that swift, effective intervention is needed in the face of financial collapse. We need to give free rein to fiscal and monetary authorities to take aggressive steps when financial turmoil turns into financial crisis. One Dark Age is one too many.

Must-Read: Dan McCrum: A Dirty Dozen Decisions Deferred

Posted on by Brad DeLong

Must-Read: I know that Ben Bernanke is depressed and unhappy at his consistent overoptimism while Fed Chair about the likely pace of recovery. But what I do not know is what steps the Federal Reserve has taken to rejigger its model to cure it of what is by now nearly a decade of overoptimism. I hope there has been a deep rethink, rather than just the ascription of bad performance to a whole bunch of negative residuals in sequence:

Dan McCrum: A dirty dozen decisions deferred: “Forward guidance under Ben Bernanke and then Janet Yellen has been…

…changeable, notes David Kelly, chief strategist for JP Morgan Asset Management, who shares a reminder of the shifting timescale. Here’s the Federal Reserve on when it would be appropriate to raise the target range for the federal funds rate: January 2009 — not ‘for some time’. March 2009 — not ‘for an extended period’. The US would have exceptionally low rates…: August 2011 — ‘at least through mid-2013″. January 2012 — ‘at least through late 2014″. September 2012 — ‘at least through mid-2015″. December 2012 — ‘at least as long as the unemployment rate remains above 6-1/2 per cent, inflation between one and two years ahead is projected to be no more than half a percentage point above the committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.’

Actually, it would be appropriate to maintain the target range of rates at 0 to 25 basis points until…: December 2013 — ‘well past the time that the unemployment rate declines below 6-1/2 per cent, especially if projected inflation continues to run below the Committee’s 2 per cent longer-run goal.’ March 2014 — ‘for a considerable time after the asset purchase programme ends’. Still waiting? January 2015 — ‘the Committee judges that it can be patient in beginning to normalise the stance of monetary policy.’ The Fed thinks it will be appropriate to raise rates…: March 2015 — ‘when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.’ July 2015 — ‘when it has seen some further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.’ Yeah, so about that…: September 2015 — ‘The Committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced but is monitoring developments abroad.’ The futures market now implies a 45 per cent probability of a first rate hike by December, and 54 per cent for January. Or will it be 13 times a charm?

Must-Read: Barry Ritholtz: Are the Poor [Today] Better Off than King Louis XIV?

Posted on by Brad DeLong

Must-Read: In my view, the fact that the poor in America today are in many dimensions better off then the very rich of previous centuries is part of a complex of facts that does not militate against worrying a great deal about inequality. Aristoteles of Stagira could make the case that his society was so poor that massive inequality was necessary to give some the leisure to think and guide humanity–that, until and unless we somehow acquired the stone servitors of Daedalos or the self-guiding catering carts of Hephaestos, large-scale slavery was not only a good thing but necessary and essential for civilization.

We cannot:

Barry Ritholtz: Are the Poor [Today] Better Off than King Louis XIV?: “On Fridays… I like to highlight misguided, faulty or just plain dumb analysis…

…The latter is our subject today: a dishonest and disingenuous argument that is technically correct, but cynical and misleading…. Richard Rahn of Cato Institute with the headline, ‘Common folk live better now than royalty did in earlier times’… a fatuous and politically inspired attempt to minimize the issue of income inequality, because after all, the poor today live better than kings did centuries ago! There, all problems solved…. Let’s set about fisking this intellectual detritus:

Progress Is Humanity’s Default Setting…. Of course we are much better off than people who lived centuries ago…. All Temporal Arguments Are Two-Sided… think about what the poor will enjoy a few centuries from now…. None of the poor think to themselves: ‘Huzzah! I am wealthier than French King Louis XIV!’ Nor do any lament, ‘Alas! I am enjoying less technological advantages than even the poorest schlump to be born in the year 2415… woe is me.’… Wealth Is Relative…. Mencken, only partially tongue-in-cheek, defines wealth as having $100 more than your brother-in-law….

Bad Ideas, Bad People and Bad Organizations Are What Disrupt Human Progress: One last statement of Rahn’s demands some elucidation: ‘The only thing that will stop human progress is bad government.’ There are many things that have disrupted human progress over the eons, and they tend to fall into one of those three categories…. Today, one of the biggest impediments is simple ignorance and slavish devotion to ideologies. Whether it’s irresponsible opponents of childhood vaccination or the global-warming denialists, the single most threatening force to human progress is relentless stupidity. Unfortunately, that is the one thing that progress hasn’t overcome.

Gabriel Zucman presents “The Hidden Wealth of Nations”

Posted on by Nick Bunker

Please join the Washington Center for Equitable Growth for a presentation by Gabriel Zucman on the findings in his book, The Hidden Wealth of Nations: The Scourge of Tax Havens.

Zucman’s research reveals that tax havens are a growing danger to the world economy. In the past five years, the amount of wealth in tax havens has increased by more than 25 percent—and there has never been so much money held offshore as there is today. Zucman offers an inventive and rigorous approach to quantifying how big the problem of tax havens are, how they work and are organized around the globe, and how we can begin to approach a solution.

Why is so much wealth hidden? Failed democracy.

Posted on by Bridget Ansel

This morning, the Washington Center for Equitable Growth is hosting a discussion with University of California-Berkeley economist Gabriel Zucman about his important new book, “The Hidden Wealth of Nations.” Using new data, Zucman documents that eight percent of global financial wealth is held in offshore tax havens, with the majority of that hidden wealth held by wealthy people living in the world’s leading economies.

When this hidden wealth is taken into consideration, many so-called global imbalances go away. The idea that China owns the United States, for example, turns out to be a myth. The answer to “who owns the United States?” is, overwhelmingly, rich people, both in the United States and abroad. But that ownership is masked in foreign bank accounts, out of the reach of domestic tax authorities and statisticians.

The problem is worse in Europe, where tax havens such as Luxembourg and Switzerland are even more embedded in the regional financial system than are the Cayman Islands and the Bahamas in the U.S. context. And tax havens hiding private wealth are absolutely pervasive when it comes to the oligarchies of Russia, China, and the Middle East.

It’s worth noting that few economists would support the existence or proliferation of tax havens. By reducing the capital tax base, tax havens increase the effective tax rate on the capital that remains within the reach of tax authorities, creating a distortion that, in principle, reduces everyone else’s incentive to amass wealth. Those savvy enough to open a Swiss bank account generally have a lot more at stake than ordinary savers. Thus, tax havens impair both efficiency and equity.

Zucman proposes several policies for dealing with tax havens—first and foremost, to create a public database of the ownership of registered securities (stocks, bonds, and other financial instruments) based on central depositories currently in private hands. As a technical matter, that is straightforward, but it is still radical: the nationalization of quasi-administrative data for the public benefit.

We already do that for the property and housing market in the United States, where all tax assessments are available to the public, and more up-to-date market values for housing wealth can be found on websites such as Zillow. Doing the same for financial wealth is straightforward, but it would challenge the interests of an even wealthier demographic: those who own securities, as opposed to housing.

Zucman further proposes to move to a global apportionment system for corporate taxation. Corporate use of tax havens differs from individuals because the existence of corporate stash-houses isn’t hidden from authorities. Instead, they are simply built in the places with the lowest corporate tax rates, regardless of where the company conducts substantial business operations. Under the system Zucman proposes, companies would add up their global profits and then pay taxes in different jurisdictions depending on some formula that “apportions” profits—for instance, the share of employment or of sales (or a combination of factors) in each jurisdiction. The United States already does that for corporate taxation in different states, so it is technically feasible in principle but would require international cooperation.

But if the economics is so clearly against tax havens and the policy solutions are straightforward, then how did we get to where we are? The answer is not that a few villainous, self-serving countries act as parasites on the world economy by offering rich people a way out of their responsibilities. Unfortunately the situation isn’t that straightforward.

In fact, U.S. policymakers tacitly encourage the proliferation of tax havens and the chicanery that enables rich people and corporations to stash their money beyond the reach of the Internal Revenue Service (with a few notable exceptions, including the Foreign Account Tax Compliance Act of 2010). Even now, Congress is debating a “Repatriation Holiday,” which would allow companies who strategically book large profits at overseas subsidiaries to avoid corporate taxes by returning their cash stockpiles to their U.S. shareholders. Even talking about such a policy furthers such tax avoidance, since it signals to companies that they won’t have to pay up if they hold out long enough.

Speaking of Luxembourg, Zucman writes, “Starting in the 1970s, the government initiated an unheard-of enterprise: the sale to multinationals throughout the world of the right to decide their own rate of taxation, regulatory constraints, and legal obligations for themselves.” In other words, companies get to choose their own tax rates by strategic use of low-tax jurisdictions to earn profits and conduct some of their operations, and wealthy individuals do as well. That is not a privilege available to ordinary citizens. But the trend has been mimicked everywhere, directly by authorities in havens and indirectly by those in productive economies who tolerate them.

Moving beyond tax havens in particular, the ideological justification for low and falling rates of taxation on capital is the Chamley–Judd Theorem, which “proves” that the optimal tax rate on capital is zero in the long run. According to the theorem, anything more destroys the incentive to save and thus the productive capacity of the economy. That is why, the same thinking goes, even workers who don’t own any capital should prefer zero taxes on capital. Whatever its theoretical merit–and recent research suggests it doesn’t have much–the intellectual influence of the theorem has been strong. In the United States, as in most countries, the individual tax rate on capital is below the income tax rate precisely in order to incentivize people to save, and recent proposals involve eliminating capital taxes altogether for that reason.

Why is the Chamley-Judd result relevant to international tax havens? Unfortunately for the rich, public sentiment is not always as enlightened as mathematical economics, especially in the voting booth, and the possibility exists that a dangerous capital-taxing radical might sweep to power. That “threat” can be neutralized if the wealthy avail themselves of tax havens. All of this is part of the larger trend among policymakers to be too credulous about formal “optimal policy” results in theoretical economics.

But the worse tendency is to enshrine those theoretical results in the policymaking apparatus at the expense of democratic control. Besides optimal capital taxation and tax havens, a second example of that anti-democratic dynamic at work is the European Union’s macroeconomic policymaking in the aftermath of the Great Recession and the ongoing crisis in Greece. The notion is that democratically elected leaders might give way to voters’ misguided populism and enact irresponsible policies, whereas sound macroeconomic management requires exacting great pain from the workforce and the electorate in the form of fiscal austerity. Thus, the only way to ensure sound policymaking is to hand over power to unaccountable transnational elites—in the case of the Eurozone crisis, those would be the European Commission, the European Central Bank, and the International Monetary Fund.

A third example is the outsourcing of environmentally harmful industries to developing countries—as discussed in Erik Loomis’s excellent recent book “Out of Sight”—where elites are even more beholden to polluters than in the rich world. Outsourcing allows job-creating businesses to avoid the supposed scourge of populist over-regulation. In effect, they choose their own (lax) regulatory environment, just as Zucman writes about in his analysis of tax havens.

Subverting democratic control of economic policy is a big reason why inequality has gotten so high across the developed world. Zucman’s book carefully documents the result in the case of tax havens, but the lesson is far more general: Inequality is high because of past inegalitarian choices that policymakers have made, and we must revisit those choices if we’re to address inequality going forward.

Noted on the Morning of September 21, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Louise Sheiner: Implications of the Growing Gap in Life Expectancy by Income

Posted on by Brad DeLong

Must-Read: There is an argument that inequality does not matter much anymore. The argument goes like this: Income and wealth inequality used to matter a lot because the poor (and even the middle class) were always hungry and sometimes starved. But with the coming of modern nutrition, public health, and literacy standards, inequality no longer matters much–it becomes a set of social status games, rather than something that brutally affects your life-chances and your life.

But now we have the extraordinary rise in this Second Gilded Age of ours in diverging life expectancy by income class. We badly, desperately need to get a handle on where this is coming from and what this means. I do not think that we have a proper handle on it yet:

Louise Sheiner: Implications of the Growing Gap in Life Expectancy by Income: “The numbers… are alarming:

…If recent trends continue, the difference in life expectancy at age 50 between men in the top 20% and bottom 20% of the earnings distribution is expected to increase from 5 years for men born in 1930, to about 13 years for men born in 1960.
Virtually all of the gains in life expectancy between the 1930 and 1960 cohorts are enjoyed by the top 60% of the income distribution. For women, life expectancy might actually be falling at the bottom of the earnings distribution…. Life expectancy for men and women born in 1930 and 1960 by five groups of lifetime earnings from poorest (quintile 1) to riches (quintile 5)…. Examining the likelihoods of reaching age 85. For men in the bottom of the earnings distribution, the probability of reaching age 85 has barely budged…. But for those in the top 20 percent of the earnings distribution, the probability of reaching 85 was 45 percent for those turning 50 in 1980, and 66 percent for those turning 50 in 2010:

Implications of the growing gap in life expectancy by income Brookings Institution Implications of the growing gap in life expectancy by income Brookings Institution

Must-Read: Casey Schoeneberger: EVENT: Gabriel Zucman presents “Hidden Wealth of Nations: The Scourge of Tax Havens”

Posted on by Brad DeLong

Must-Read: Casey Schoeneberger: EVENT: Gabriel Zucman presents “Hidden Wealth of Nations: The Scourge of Tax Havens”: “Please join the Washington Center for Equitable Growth…

…for a presentation by Gabriel Zucman on the findings in his book, ‘Hidden Wealth of Nations: The Scourge of Tax Havens.’

Zucman offers an inventive and rigorous approach to quantifying how big the problem of tax havens are, how they work and are organized, and how we can begin to approach a solution. His research reveals that tax havens are quickly a growing danger to the world economy. In the past five years, the amount of wealth in tax havens has increased over twenty five percent – and there has never been as much money held offshore as there is today. Fighting the notion that any attempts to solve the tax haven problem are futile, since some countries will always offer more advantageous tax rates than others, as well as the counter-argument that after the financial crisis many countries have successfully fought tax evasion, Zucman argues that both sides are actually very wrong.

Hidden Wealth of Nations offers an ambitious agenda for reform, focused on ways in which countries can change the incentives of tax havens. The author argues that only by first understanding the extent of wealth held in secret can policymakers begin to address the problem….

Welcome:

  • Heather Boushey, Executive Director and Chief Economist, Washington Center for Equitable Growth

  • Featured author: Gabriel Zucman, author of ‘The Hidden Wealth of Nations – The Scourge of Tax Havens’ and Assistant Professor of Economics, University of California, Berkeley

  • Panel:

    • Diana Farrell, President and Chief Executive Officer, JPMorgan Chase Institute
    • Steven M. Rosenthal, Senior Fellow, Urban-Brookings Tax Policy Center
    • Catherine Rampell, Columnist, The Washington Post (Moderator)

When: September 22, 2015. Registration and breakfast: 8:30 a.m. Presentation and panel: 9:00 a.m. – 10:30 a.m.

Where: Hotel Monaco, Washington DC, 700 F St NW, 4th Floor, Paris Ballroom, Washington, DC 20004