Category: Equitablog

New data on the changing U.S. occupational structure

Posted on by Emilie Openchowski
Nurse Charlene Amato-Geib looks at the da Vinci Surgical Robot being demonstrated at Allegheny General Hospital, in Pittsburgh.

During the post-industrial period, there have been rapid changes in the composition and substance of U.S. jobs. Technological change, globalization, and other factors have changed the nature of work over the course of the past century such that standard occupational distinctions may no longer be telling us what they used to about pay, job quality, or skills requirements.

In economics, industry and occupation are the standard way to characterize jobs. The U.S. Census Bureau’s classification of occupations in 2000 is vastly different from the occupational categories and qualities of the 1960s. In the 1960s, the jobs in each category were fundamentally similar along many dimensions, including skill level, contributing to more consistent wages within occupations and industries. However, these classifications no longer seem to be useful in the same way for organizing the nature of work.

A recent paper by economists Enghin Atalay, Phai Phongthiengtham, Sebastian Sotelo, and Daniel Tannenbaum shows that as occupational tasks have evolved since the 1960s, particularly from routine to nonroutine tasks, most of these shifts have occurred within, rather than across, occupations.

For example, in the early 20th century, nursing was an occupation that required little to no training; nurses learned hospital etiquette and basic health care skills. Today, however, nursing requires medical training, and nurses have a whole new set of patient-care responsibilities. Changes in the ways patient records are maintained and medications are tracked and ordered, as well as changes in equipment used in nursing, have transformed the profession.

The authors’ work builds on the labor market polarization hypothesis, which argues that technological change reduced demand for routine tasks, which led to a reduction in wages for low- and middle-wage workers in the latter part of the 20th century. They have constructed a database of occupational characteristics such as skills requirements, technology use, and work activities from text analyses of job ads published between 1940 and 2000 in the Boston Globe, the New York Times, and the Wall Street Journal.

Changes both between and within occupations can help explain wage polarization. As this paper suggests, the post-industrial economy brought greater variation within occupations that contributed to a widening of the wage distribution among American workers, driving up earnings inequality. As a result, occupational classifications focused on differences across occupations explain less of the widening pay gap. If that’s the case, then researchers may want to find other meaningful categorizations that could help us distinguish between high- and low-quality jobs. (Some researchers have pointed to increases in the use of performance pay, occupational segregation, and discrimination as other factors that may be contributing more to pay inequality across groups.)

The federal government plays an important role in the collection of data on labor market composition, including occupations. The Bureau of Labor Statistics began conducting the Occupational Requirements Survey, or ORS, in 2015 to fill a gap in understanding of historical rates of change in job requirements and metrics that might be used to track changes in job characteristics over time. Although researchers generally agree that changes in occupational skills requirements are gradually accelerating, statistical averages sometimes mask important movements among low- and high-skilled jobs. The ORS will help get beyond those averages to help researchers better explore the changes in different parts of the occupational distribution.

The evolving U.S. occupational structure

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Authors:

Enghin Atalay, Assistant Professor of Economics, University of Wisconsin – Madison
Phai Phongthiengtham, Ph.D. student in Economics, University of Wisconsin – Madison
Sebastian Sotelo, Assistant Professor of Economics, University of Michigan – Ann Arbor
Daniel Tannenbaum, Assistant Professor of Economics, University of Nebraska – Lincoln

Abstract:

Using the text from help wanted ads, we construct a new data set of occupational task content from 1960 to 2000. We document that within-occupation task content shifts are at least as important as employment shifts across occupations in accounting for the aggregate decline of routine tasks. Motivated by these patterns, we first apply our new task measures to a reduced-form statistical decomposition. We then embed our measures in an equilibrium model of occupational choice. These two exercises indicate that shifts in the relative demand for tasks account for a 25 log point increase in 90-10 earnings inequality over our sample period.

Must-Read: Jason Furman and Larry Summers: Susan Collins is wrong to say that the tax cuts will pay for themselves, despite the economists she cites

Posted on by Brad DeLong

Must-Read: I do not think Jason and Larry are shrill enough here. The Nine Unprofessional Republican Economists sought to convince people like Susan Collins that the tax “reform” would roughly pay for itself with their “raise the level of GDP in the long run by just over 4%. If achieved over a decade, the associated increase in the annual rate of GDP growth would be about 0.4% per year”. They then seek, subsequently, to preserve some shred of their professional reputations by claiming that “we did not offer claims about the speed of adjustment to a long-run result”.

The hair being split is, I have been told, that “if” here does not mean “it could be that” but “although it is not the case, for example that jump”.

I haven’t found anybody who does anything but laugh at that

So let me give Jason and Larry the mic: Jason Furman and Larry Summers: Susan Collins is wrong to say that the tax cuts will pay for themselves, despite the economists she cites: “Sen. Susan Collins… defended her vote on the Senate GOP tax bill…

…If you take the CBO’s formula and apply it, just four-tenths of one percent increase in the GDP generates revenues of a trillion dollars…. So I think if we can stimulate the economy, create more jobs, that does generate more revenue…

a claim that the tax bill will pay for itself…. Chuck Todd… challenged Collins to produce a study suggesting that tax cuts do not create larger deficit. The senator responded:

Well, talk to economists like Glenn Hubbard and Larry Lindsey and Douglas Holtz-Eakin, who used to be head of CBO, and they will tell you otherwise…

We believe it is very important for public understanding that Holtz-Eakin, Hubbard and Lindsey make their views on tax cuts paying for themselves clear. If they believe as we do, as all the members of a nonpartisan panel of distinguished economists assembled by the University of Chicago, as Holtz-Eakin asserted earlier this year, and Hubbard asserted some time ago, that tax cuts do not come close to paying for themselves, this seems essential to clarify…. It would be useful for any of them to clarify that the Republican-appointed Joint Committee on Taxation’s (JCT) modeling is nonpartisan, expert and superior to more partial and partisan analyses… [hat] the JCT’s estimate of less than a 0.08 percentage point additional annual growth rate increase is not inconsistent with the long-run output increases the authors claimed in their letter to Treasury Secretary Steven Mnuchin, as they clarified in their response to us.

Alternatively if Holtz-Eakin, Hubbard and Lindsey now believe that tax cuts will pay for themselves, we think it appropriate for them to provide a basis for this belief in light of the many issues we have raised about their letter to Mnuchin.

As I wrote: In universities—and thinktanks—concern for one’s academic reputation and the good opinion of colleagues in the context of a community that places the highest value on truth-seeking, truth-telling, and high-quality debate is supposed to keep such unprofessional behavior to a minimum.

Just before he was canned from Berkeley during the Red Scare, medieval history professor Ernst Kantorowicz argued that the academic robe worn by scholars on formal occasions was a sign of this dedication to truth-seeking, truth-telling, and high-quality debate: academics had placed themselves under a geas to think hard and say what they believed to be true, and that in carrying out this geas they were responsible to “their conscience and their God”.

But what if we find that there are large numbers of university professors and thinktank fellows who fear neither God nor their consciences—and who value the support of donors and the approval of partisans more than their internal academic reputations? The process of socialization and acculturation was supposed to keep such people out of universities and thinktanks, and in law and lobbying firms where it was understood that people were simply offering arguments rather than claiming to be setting forth truths, and from which their arguments could be assessed with boatloads of salt. What if this process fails?

Yingyi Qian: How Reform Worked in China: The Transition from Plan to Market

Posted on by Brad DeLong

Should-Read: Yingyi Qian: How Reform Worked in China: The Transition from Plan to Market: “A noted Chinese economist examines the mechanisms behind China’s economic reforms, arguing that universal principles and specific implementations are equally important…

…As China has transformed itself from a centrally planned economy to a market economy, economists have tried to understand and interpret the success of Chinese reform. As the Chinese economist Yingyi Qian explains, there are two schools of thought on Chinese reform: the “School of Universal Principles,” which ascribes China’s successful reform to the workings of the free market, and the “School of Chinese Characteristics,” which holds that China’s reform is successful precisely because it did not follow the economics of the market but instead relied on the government. In this book, Qian offers a third perspective, taking certain elements from each school of thought but emphasizing not why reform worked but how it did. Economics is a science, but economic reform is applied science and engineering. To a practitioner, it is more useful to find a feasible reform path than the theoretically best way.

…The key to understanding how reform has worked in China, Qian argues, is to consider the way reform designs respond to initial historical conditions and contemporary constraints. Qian examines the role of “transitional institutions”—not “best practice institutions” but “incentive-compatible institutions”—in Chinese reform; the dual-track approach to market liberalization; the ownership of firms, viewed both theoretically and empirically; government decentralization, offering and testing hypotheses about its link to local economic development; and the specific historical conditions of China’s regional-based central planning…

Should-Read: Austin Clemens and Heather Boushey: What if we took equity into account when measuring economic growth?

Posted on by Brad DeLong

Should-Read: Austin Clemens and Heather Boushey: What if we took equity into account when measuring economic growth?: “The four measures shown in the graphs above could all be reasonable ways of thinking about measuring progress in the U.S. economy…

…Each requires making a value judgement about what kind of growth we value. This is no less true of GDP growth…. GDP growth can paint a very misleading picture of the health of the economy, suggesting that we are in a robust recovery when, in fact, only a small number of households are benefitting. Furman is right to suggest that this is a debate economists and policymakers should have. Unfortunately, the economic indicators reported by the U.S. Bureau of Economic Analysis do not provide sufficient detail to calculate, for example, the mean log of income…. The National Income and Product Accounts provide no distributional information at all. The task of decomposing growth by income quantile has fallen to academic economists. Until the BEA takes up the task of reporting distributional income totals, decisionmakers will continue to lean on GDP growth, and they will continue to be misled by it…

Should-Read: Peng Zhang et al.: Temperature Effects on Productivity and Factor Reallocation: Evidence from a Half Million Chinese Manufacturing Plants

Posted on by Brad DeLong

Should-Read: Peng Zhang et al.: Temperature Effects on Productivity and Factor Reallocation: Evidence from a Half Million Chinese Manufacturing Plants: “This paper uses detailed production data from a half million Chinese manufacturing plants over 1998-2007…

…to estimate the effects of temperature on firm-level total factor productivity (TFP), factor inputs, and output. We detect an inverted U-shaped relationship between temperature and TFP and show that it primarily drives the temperature-output effect. Both labor- and capital- intensive firms exhibit sensitivity to high temperatures. By mid 21st century, if no additional adaptation were to occur, we project that climate change will reduce Chinese manufacturing output annually by 12%, equivalent to a loss of $39.5 billion in 2007 dollars. This implies substantial local and global economic consequences as the Chinese manufacturing sector produces 32% of national GDP and supplies 12% of global exports…

Should-Read: Greg Leiserson: The Tax Foundation’s treatment of the estate tax in its macroeconomic model

Posted on by Brad DeLong

Should-Read: Greg Leiserson looks to me to be correct here: the structure of the Tax Foundation’s model is inconsistent. Or, rather, the only consistency is: “what assumption about this piece will produce a result more to the liking of our Republican political masters?”: Greg Leiserson: The Tax Foundation’s treatment of the estate tax in its macroeconomic model: “Notably, this justification for the assumption that the marginal investor is domestic even as the rate of return is fixed…

…because the United States is appropriately modeled as a small open economy—appears to exist entirely outside its model. As best I can determine… the Tax Foundation model itself appears to include no explicit model of markets in government debt (or other low-risk assets), the composition of savers’ portfolios, and the allocation of assets between domestic and foreign investors. Thus, while the Tax Foundation asserts that a difference in risk tolerance between domestic and foreign investors justifies its modeling assumptions, it is simply impossible to consider these issues…

Gains from Trade: Is Comparative Advantage the Ideology of the Comparatively Advantaged?

Posted on by Brad DeLong

And the video from October is up:

INET Edinburgh Panel: Gains from Trade: Is Comparative Advantage the Ideology of the Comparatively Advantaged?:

My notes and slides:

Ricardo’s Big Idea, and Its Vicissitudes

https://www.icloud.com/keynote/0QMFGpAUFCjqhdfLULfDbLE4g

Ricardo believes in labor value prices because capital flows to put people to work wherever those things can be made with the fewest workers. This poses a problem for Ricardo: The LTV tells him that capitalist production should take place according to absolute advantage, with those living in countries with no absolute advantage left in subsistence agriculture.

The doctrine of comparative advantage is Ricardo’s way out. For him, the LTV holds within countries. Countries’ overall price levels relative to each other rise and fall as a result of specie flows until trade balances. And what is left is international commodity price differentials that follow comparative advantage. Merchants profit from these differentials, and their demand induces specialization.

Thus Ricardo reconciles his belief in the LTV with his belief in Hume’s “On the Balance of Trade“ and with the fact that capitalist production is not confined to the industry-places with the absolute advantage. His doctrine reconciles his conflicting theoretical commitments with the reality he sees, as best he can.

By now, note that we are far away from the idea that “comparative advantage” justifies the claim that free trade is for the best in the best of all possible worlds. There are a large number of holes in that argument:

  • Optimal tariffs.
  • The fact of un- and underemployment.
  • Externalities as sources of economic growth, in any of the “extent of the market”, “economies of scale”, “variety”, “learning-by-doing”, “communities of engineering practice”, “focus of inventive activity”, or any of its other flavors.
  • Internal misdistribution means that the greatest profit is at best orthogonal to the “greatest good of the greatest number” that policy should seek.

Given these holes, the true arguments for free trade have always been a level or two deeper than “comparative advantage”: that optimal tariff equilibrium is unstable; that other policy tools than trade restrictions resolve unemployment in ways that are not beggar-thy-neighbor; that countries lack the administrative competence to successfully execute manufacturing export-based industrial policies; that trade restrictions are uniquely vulnerable to rent seeking by the rich; and so forth.

The only hole for which nothing can be done is the internal misdistribution hole. Hence the late 19th C. “social Darwinist” redefinition of the social welfare function as not the greatest good of the greatest number but as the evolutionary advance of the “fittest“—that is, richest—humans.

Hence “comparative advantage” takes the form of an exoteric teaching: an ironclad mathematical demonstration that provides a reason for believing political-economic doctrines that are in fact truly justified by more complex and sophisticated arguments. And, I must say, arguments that are more debatable and dubious than a mathematical demonstration that via free trade Portugal sells the labor of 80 men for the products of the labor of 90 while England sells the labor of 100 men for the products of the labor of 110.

But even if you buy all the esoteric arguments that underpin the exoteric use of comparative advantage on the level of national political economy, there still is the question of the global wealth distribution. Stipulate that the Arrow-Debreu-Mackenzie machine generates a Pareto-optimal result. Stipulate that every Pareto-optimal allocation maximizes some social welfare function. What social welfare function does the Arrow-Debreu-Mackenzie machine maximize.

It maximizes the social welfare function with Negishi weights. When individual utilities are weighted before they are added, each individual’s is waited by the inverse of their marginal utility of wealth. If the typical individual utility function has curvature that corresponds to a relative risk aversion of one, then Negishi weights are proportional to each individual’s wealth. For a relative risk aversion of three, Negishi weights are proportional to the cube of each individual’s wealth.

“Comparative advantage” is the market economy on the international scale. And the market economy is a collective human device for satisfying the wants of the well-off. And the well-off are those who control scarce resources useful in producing things for which the rich have a serious Jones.

Thank you.

2017-10-22 :: 673 words

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Dan Alpert, et al: Sales Factor Apportionment and International Taxation

Posted on by Brad DeLong

November 29, 2017

The Honorable Orrin Hatch, Chairman
US Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Kevin Brady, Chairman
US House Committee on Ways & Means
1102 Longworth House Office Building
Washington, DC 20515

The Honorable Ron Wyden, Ranking Member
US Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Richard Neal, Ranking Member
US House Committee on Ways & Means
1106 Longworth House Office Building
Washington, DC 20515

Re: Support for sales factor apportionment for international corporate taxation

Dear Chairmen Hatch and Brady, and Ranking Members Wyden and Neal:

We are writing to urge you to adopt a sales-based formulary apportionment (also called sales factor apportionment) regime for international corporate taxation as you proceed with your tax reform efforts. Solidifying the tax base should receive as much attention as setting the corporate tax rate. This is a once in a generation opportunity to improve the tax code. It should not be wasted.
Sales factor apportionment (SFA) is, in our view, the best way to tax all firms-domestic, multinational and foreign-fairly in an integrated world economy.

The current tax system has incentivized corporate inversions, profit shifting, recognition deferral and other notorious ills. It relies upon separate accounting of profits on a location by location basis so that multinational corporations (MNCs) strategically allocate earnings and costs in each location in which they operate. Though our current system purports to tax MNCs worldwide income, profit-shifting allows them to evade taxation on the basis of where their net income “lands” rather than where their gross income originates. The result is tremendous incentives to “earn”-i.e. to declare-income in low-tax countries. It is a classic race to the bottom causing the US corporate income tax base to erode at an alarming rate.

Tax competition between countries is highly incentivized by the current regime. While the effective US corporate income tax rate is estimated at 27%, it is mostly avoided by MNCs which are thus systematically advantaged relative to domestic US producers. Tax haven jurisdictions, where a large proportion of corporate earnings are reported, have very low effective rates between zero and five percent. Those countries include the Netherlands (2.3%), Ireland (2.4%), Bermuda (0.0%), Luxembourg (1.1%), Singapore (4.2%), UK Islands Caribbean (3.0% and Switzerland (4.4). Lowering the US corporate tax rate to 20% does not materially change the incentive to allocate profits to these “Cayman-style” jurisdictions.

 

Congress cannot confidently set a tax rate until it solidifies the tax base.

Profit-shifting continues to rise dramatically. In 2001, estimated profit-shifting by US MNCs to tax haven jurisdictions reduced corporate tax haven jurisdictions reduced corporate tax revenue by less than $15 billion. In 2012, that number rose to nearly $120 billion. In 2016, the number is at least $134 billion. These estimates do not include revenue loss from corporate inversions or profit shifting by foreign MNCs.

Domicile (country of incorporation) should not matter, but it does under the current tax system, creating troubling taxation distinctions. US domiciled MNCs use deferral to delay paying US taxes on overseas profits so long as they keep those profits offshore. Less sophisticated US companies pay taxes on all their profits. Foreign domiciled corporations doing business in the US pay taxes on a territorial basis. In other words, they pay taxes on profits actually recognized here. This territorial, versus worldwide, tax differences incentivizes corporate inversions – the practice of relocating a corporation’s legal domicile to a lower-tax jurisdiction, usually while retaining its material operations in the US and continuing to sell to US customers.

Ending deferral has been suggested as a solution. It would level the playing field between US domiciled companies that are primarily domestic versus MNCs. But it does not resolve the problem of inversions or profit shifting by foreign MNCs. The House bill includes a minimum tax of 10% on overseas profits. But the 10% domestic versus foreign earned profits differential maintains strong incentives to allocate profits offshore.

Redefining the source of income is, in our view, the key to correcting the current dysfunction. This is what the sales factor apportionment system, already in use by most US states, does. Corporations earn income from sales. Therefore income should be allocated based upon the destination of those sales. MNC income should no longer be allocated based upon the location of a a subsidiary that allegedly earned it. The location of sales is much more difficult to manipulate than the “origin of income” under the current system.

The US tax base for corporations would be calculated on the basis of a fraction of companies’ worldwide income. This fraction would be the share of each company’s worldwide sales that are destined for customers in the United States. The taxpayer, under SFA, is the whole unitary business, including all evasion-motivated subsidiaries over which the parent corporations exercise legal and economic control.

The SFA system we support is similar to the method used by many US states to allocate national income. These states adopted SFA to solve the difficulty of assigning profits, for state corporate income tax purposes, from national or international corporations to individual states. They faced an additional problem in that taxing based upon property or employees located in the state created incentives to move production out of that state. Using a sales-based taxation method solved this problem because locations of sales if far less responsive to tax differentials. Customers are far less mobile than the firm’s assets or employees.

What we are advocating is a change of the US corporate tax base that replicates the changes the states have made in relation to the nation. In effect, firms should be taxed on their access to a specific consumer market-from which they generate revenue—rather than on their cleverness at artificially allocating expenses and revenue in tax havens in which their subsidiaries “incorporate”.

By focusing upon sales as the measure of taxable economic activity, the SFA system does not rely upon or incentivize artificial legal distinctions among types of firms. Subsidiaries, branches and hybrid entities are all considered a unitary business for tax purposes-which, after all, is what they are. Whether a parent or a subsidiary is incorporated in the US or elsewhere makes.

 

No practical difference to production, sales or distribution. Hence it should make no difference to taxation.

An SFA system would improve America’s trade competitiveness because it provides domestic producers a further incentive to export. Profits from sales oversees would not be subject to taxation. Foreign producers who sell goods and services here would pay taxes on profits arising from the privilege of accessing our market. No corporate tax benefit would arise from moving a US plant oversees.
A recent study by the Coalition for a Prosperous America (CPA) found that SFA would deliver 34% more tax revenue from US corporations in 2016 at the current tax rate. CPA further estimated that a switch to SFA at a 20% rate would add an estimated $1.04 trillion uplift to tax revenue over the next 10 years. While these numbers would have to be verified by the Joint Committee on Taxation, there is no doubt that tax revenue can be substantially improved with a solidified tax base.

SFA has features that can bridge the partisan divide to establish meaningful corporate tax reform. It achieves the Republican goal of a territorial tax on corporate income and the Democratic goals of raising revenue. SFA will eliminate tax competition because the corporate tax rates in other countries become largely irrelevant. It will treat all types of firms the same.

It is for these reasons that we ask you to establish sales factor apportionment as the basis for corporate income tax reform.

Sincerely,

Daniel Alpert
Founder, Westwood Capital
LLC Fellow, The Century Foundation

Dean Baker
Co-Director
Center for Economic and Policy Research

Robert Hockett
Edward Cornell Professor of Law
Cornell School of Law

Marshall Steinbaum
Research Director and Fellow
Roosevelt Institute

Brad DeLong
Professor of Economics
University of California, Berkeley

Gabriel Zucman
Assistant Professor of Economics
University of California, Berkeley

Michael Stumo
Chief Executive Officer
Coalition for a Prosperous America

Must-Read: Paul Krugman: La Trahison des Clercs, Economics Edition

Posted on by Brad DeLong

Must-Read: I would note that the Trumpublicans are unweaving the web of neoconservative foreign policy facts-on-the-ground even as we write: their anger, rage, and… “shrillness”, to coin a word, has substantial policy deviation causes. By contrast, the Trumpublicans “always cut taxes when you can, and rely on the Democrats to clean up your mess” has been Standard Operating Procedure for the Republican Party and for Republican policy economists (with the very honorable exception of Marty Feldstein, when he felt he could afford to be brave) since November 1980. You might say: “but this time there is a 1% of GDP transfer to the top 1% without any growth benefit at all”. The question is: Is that a substantial policy deviation from SOP of the same magnitude as the ones the neocons are facing?: Paul Krugman: La Trahison des Clercs, Economics Edition: “A former government official… asked… have any prominent Republican economists taken a strong stand against the terrible, no good, very bad tax legislation their party just rammed through the Senate?…

…I couldn’t think of any. And this says something not good about the state of at least that side of my profession. We can divide Republican economists into three groups here…. Those enthusiastically endorsing the specific bill… the 137 signatories… a… motley crew….

Second… the Nine Unprofessional Economists…. As Jason Furman and Larry Summers pointed out, they misrepresented the research they claimed supported their position, then denied having said what they said…. Explicit aid and comfort to tax cutters, with an extra dose of dishonesty and cowardice….

A third group, people like Greg Mankiw and Martin Feldstein, who have written in favor of the general idea of lower corporate taxes, which is OK…. But have any of them spoken out about the reality of the actual legislation?… I may have missed some condemnations, but I haven’t seen any. You may say that this is how everyone behaves–if your political side does bad stuff, you go silent….

Consider… neocon foreign policy types. Nobody can accuse me of having a soft spot for the likes of William Kristol, Max Boot, Jennifer Rubin, David Frum, and others…. But… under Trump they have shown real courage: they have proved willing to criticize, harshly and even shrilly, the disastrous governance of our current regime…. The foreign-policy neocon intellectuals, however wrongheaded I may find their ideas, turn out to be men and women with real principles. I wish I could say the same about conservative economists. But I can’t.