Category: Equitablog

Should-Read: Since Sam Brownback planted his behind behind the Kansas governor’s desk at the end of 2012, Kansas has lost 6%-points of employment relative to the U.S. average. And there is nothing special about Kansas that would make such a huge swing happen in such a short period—nothing but the presence of a tax-cuts-for-the-rich nut in the governor’s chair and a complaisant legislature implementing his policies. I would not in a hundred years have dared speculate that Brownbackism in Brownbackistan could be so destructive. And yet I cannot think of any alternative explanation for what has gone on:

Kansas City Star: Jerry Moran: Don’t take failed Kansas tax plan nationwide: “Moran… could be the deciding vote…. He has already seen, first-hand, during a very painful five years, what will happen…

…At a forum Moran held at the Tasty Pastry in Clay Center last weekend, one of his constituents, Robynn Andracsek, of Olathe, neatly summed up the apparent thinking behind the bill: “Let’s cut taxes for millionaires and billionaires, and then let’s figure out how to pay for it.” Instead, she pleaded with him, “Let’s do a sensible tax cut. This is Kansas. We know the trickle-down experiment doesn’t work. All of our members of Congress from Kansas should know that.” Should but do not. Or if they do, betray no sign of it.

Every Kansan knows what happened after Gov. Sam Brownback’s 2012 cuts did away with the state income tax for some 330,000 business owners. The governor kept insisting—and in fact, still does—that robust growth and woohoo, jobs galore would result. When that didn’t happen, elected officials kept having to dip into funds set aside for highways and schools just to balance the budget. Finally, this year, lawmakers overrode a Brownback veto and at last repealed the LLC tax break and raised income tax rates.

That had to happen, as Andracsek reminded Moran, “because we decided we want schools and we want roads.” Knowing all that history, she asked him, “Why would you take this failed experiment nationwide? Our members of Congress should be the ones leading the way for tax reform that actually affects normal people, not just millionaires and billionaires.”… Moran assured voters in Clay Center that “I’m also cognizant of what people saw happen in Kansas.” And even if that weren’t the case, he said, “there is plenty of conversation about Kansas in Washington, D.C.”

Senator, we understand that you want to get something accomplished. But you don’t have the luxury of the ignorance that the president could plausibly claim when just days after his election he went around promising applauding, whistling patrons in one of New York’s best restaurants, “We’ll get your taxes down, don’t worry about it.” We want to believe you, Senator, when you say, “My goal is to find out which taxes you cut can actually help create more jobs, better jobs, higher-paying jobs … and which ones don’t do that. Not all of them do that.” “There are still a lot of conversations to be had,” you say. But please have the toughest one of all with that small-town banker who insists that his top priority is to stay connected to Kansans….

You know what’s wrong with this bill…. So all you have to do now is vote accordingly.

Should-Read: Economist: Jean Tirole: Standing up for economists: “Review of Economics for the Common Good. By Jean Tirole. Translated by Steven Rendall. Princeton University Press; 576 pages; $29.95 and £24.95…

…Economics is perfectly capable of incorporating questions of morality, says Mr Tirole. It simply imposes structure on debate where otherwise indignation would rule. It might make sense to ban some markets, like dwarf-tossing, he says: its existence diminishes the dignity of an entire group. But a market in organs or blood, for example, should not be rejected on the basis of instinctive moral repugnance alone. Policymakers should consider whether payment would raise the supply of donated blood or kidneys, improving or even saving lives. (It might not, if the motivation of money makes generous people afraid of looking greedy.) Whatever the answer, policymakers should make decisions from “behind the veil of ignorance”: without knowing whether any one person, including the policymakers themselves, would be a winner or loser from a particular policy, which society would they choose?

Mr Tirole applies this type of reasoning to topics ranging from carbon taxes to industrial policy, from competition to the digital economy. He presents economists as detectives, sniffing out abuse of market power and identifying trade-offs where populists make empty promises. His analysis is laden with French examples of ill-advised attempts to defy the constraints that those in his discipline delight in pointing out. When in 1996 the French government blocked new large stores in an effort to restrain the power of supermarket chains, share prices of existing ones rose. The new laws inadvertently worsened the problem by restricting competition.

He also depicts economists as ill-equipped to deal with the dirty reality of politics. To those who might be catapulted into sudden stardom as he was, he warns that academic economists will be quickly put into political pigeonholes, and their arguments celebrated or dismissed according to whether the recipient favours that pigeonhole. Though populists revel in simplicity, his aim is to make economics context-specific and point out its complexities. This is his strength, but his discipline’s limitation. He is economists’ defender, but not their saviour.

Must-Read: Jason and Larry bring plenty of refreshments to the debate over tax “reform”. They are really unhappy with the Nine Unprofessional Republican Economists. Shrill, even. And so they provide great detail on how these nine economists are being unprofessional. This is good to see:

Jason Furman and Larry Summers: A modest proposal: time to rethink the impact of US tax reform: “You recently wrote an open letter to Treasury Secretary Mnuchin quantifying the economic impact of tax reform…

…We are interested in and surprised by your analysis. We share your commitment to the idea that well-designed tax reform can make the economy stronger and that careful economic analysis is essential. And we know that you all share our belief that such careful analysis is well served by discussion and debate of these issues that is at least as frank and vigorous as what we are all accustomed to in the average economics seminar. To that end, we think it would be useful to lay out some of the questions we have about your analysis:

1. Many members of Congress are citing growth estimates consistent with your letter to claim that the tax cuts would pay for themselves and that the legislation currently being considered by Congress would not add to the deficit or debt over the next decade. Your letter, however, does not say that tax cuts would pay for themselves. Would it be fair to say that you agree with Martin Feldstein (who did not sign the letter) that these tax cuts will not pay for themselves and, in fact, would add more than $1tn to the debt over the next decade?
2. Can you explain how the studies you cite justify the conclusions you reach? You cite three studies to justify your conclusion that the annual growth rate would rise by 0.3-0.4 percentage points over the next decade. But two of these studies actually appear to have estimated substantially lower growth rates — potentially as low as a 0.01 percentage point increase in the annual growth rate.

   You cite a Treasury study of the Bush tax reform commission’s growth and investment tax plan that you asserted found a 4.8 per cent increase in long-run GDP. But the study you refer to provides estimates from three different models ranging from 1.4 per cent to 4.8 per cent increases in national income and does not express any views on which model is preferred.

   What was your reason for citing only the upper end of the range of Treasury’s estimates, from one model and ignoring its other calculations? Also, why did you not mention that the middle of the range of Treasury’s 10-year estimates was 1 per cent, a figure that would corroborate the views of critics of the tax bills since there would be only a 0.1 percentage point increase in the growth rate? (Moreover, the Bush Commission’s growth and investment tax plan differed in important ways from the one before Congress: it included permanent expensing, applied expensing to structures, raised taxes on investments that are already in place and was fully paid for. Do these differences affect the validity of your use of this plan as a model for the current Congressional bills?)

   You also cite an OECD study that you say justifies the conclusion that long-run GDP would go up by 2 per cent. But since you are explicitly talking about 10-year growth rates in your letter, would it not be better to use estimates from this same study that show that the effect in the 10th year is less than one-third of the long-run effect, translating into an annual growth rate of less than 0.1 percentage point? Moreover, how did you come up with the 2 per cent long-run GDP number since the OECD study says that a 1 per cent of GDP reduction in corporate taxes adds 1.25 per cent to long-run GDP? Applying that estimate to corporate rate reductions in the Congressional bills would yield only a 0.8 per cent increase in long-run GDP, translating into a growth rate increase of 0.02 percentage point per year (and if you factored in the base broadeners, the magnitude would be half as large). Either way, the OECD study you cite also corroborates the critics of the tax bill.

3. Did you give thought to the impact of the corporate rate cut, assuming that expensing as proposed in the bill was enacted? We suspect that much of the projected growth benefit from corporate tax reform comes from enacting expensing of equipment, which reduces the entity-level effective tax rate to zero on equity-financed investment and makes it negative if financed in part with debt. In the presence of debt finance, textbook analysis would suggest that a cut in the corporate tax rate would raise the cost of capital because interest deductions would no longer be as valuable and thus discourage investment.

   Have you considered this important possibility, since most of the budget cost of the reform comes from the corporate rate reduction? Moreover, even with the lower statutory tax rates in the bills if expensing ended after five years, as it does in the bill, effective marginal tax rates on equipment investment would actually be higher than they are today with bonus depreciation in effect. It would be ironic if lower corporate rates and an expiration of bonus depreciation actually discouraged investment at the margin relative to continuing current policy but we believe this is likely.

4. The pass-through provisions in the House and Senate bills would appear to create new sources of complexity in the tax code and violate the basic principle of tax policy that similar sources of income should be taxed at similar rates. A number of you have expressed concerns about the pass-through provisions in the past. Did you model the impact that these provisions would have on macroeconomic impact of the tax cuts?
5. President Donald Trump has expressed concern about the magnitude of the trade deficit. As his chairman of the Council of Economic Advisers said, “A corporate tax cut to 20 per cent would dramatically reduce the trade deficit.” In your analysis, you reject concerns about the macroeconomic impact of budget deficits because, you argue, the United States will be able to attract capital from the global capital market. As a matter of logic, won’t increased capital inflows require an increase in the trade deficit, totaling hundreds of billions of dollars annually if they are to finance your projected 15 per cent increase in the capital stock?
6. Apart from the question of global financing of the budget deficit, do you worry about the impact of enlarged deficits given projections of rising spending on entitlements and national security? Do you think that it is realistic that Congress will actually sunset provisions like the expanded child credit or corporate expensing, or do you think that the true cost of this bill is likely to significantly exceed $1.5tn? One of the authors of your letter wrote that the Bowles-Simpson fiscal commission “was very good”, and several other signatories wrote that it should be the “starting point” for fiscal negotiations. Do you think that cutting revenue to less than 18 per cent of GDP, as would happen under the Congressional legislation, is consistent with the 21 per cent of GDP in revenue that the Bowles-Simpson commission recommended for long-run fiscal sustainability?

   Moreover, we understand that you support entitlement reform, but do you believe that it is politically realistic for the Republicans to actually achieve your goal when it would entail asking seniors to sacrifice by cutting social security and Medicare shortly after Republicans argued that we could afford to add more than $1tn to the deficit for tax cuts that largely benefit corporations and high-income households?

   Finally, one of you [Douglas Holtz-Eakin] signed a previous letter stating that because outside estimates are often “not objective and not as well informed as the Congressional Budget Office’s analysts” that relying on CBO’s estimates in the legislative process has served the Congress — and the American people — very well during the past four decades.

As the House and Senate consider potential policy changes this year and in the years ahead, we urge you to maintain and respect the Congress’s decades-long reliance on CBO’s estimates in developing and scoring bills.

Your recent letter ignores many specific features of the legislation — to give just three of many examples that you did not incorporate into your analysis: the legislation would increase the after-tax cost of research and development, would increase asymmetric penalties on corporate risk-taking and would raise effective marginal tax rates for many individuals through the repeal of the state and local tax deduction. Do you think your analysis of a highly simplified hypothetical plan that is different from the actual legislation before Congress should serve as a substitute for the Joint Committee on Taxation (JCT) and the CBO producing analysis? Do you think it is responsible for Congress to vote on technically complex legislation in the absence of hearings or complete analysis?

Thank you for your attention to these questions. We may disagree on the merits of particular proposals but as professional economists we can all agree on the importance of critical discussion and debate to advance the improved understanding that is the basis of better public policies.

Should-Read: William Best (1824): Sir Edward Coke,: “The fact is, Lord Coke had no authority for what he states…

…but I am afraid we should get rid of a great deal of what is considered law in Westminster hall, if what Lord Coke says without authority is not law…

Should-Read: Nathan Jensen: Learning public policy from Amazon: “Second, many of these state and local incentive programs are designed to provide very weak tests for providing incentives…

…The Texas Chapter 313 program says companies simply need to state that incentives are “a determining factor” in their decision. To qualify, companies only need to claim they have other options or that the incentive is necessary to make the project financially viable. No disclosures are required.

The bidding war for Amazon’s second headquarters demonstrates that some public officials are losing sight of many of these lessons. Many cities and states are putting on the table their best possible offers, but is that really good public policy? What if Amazon has already chosen a location—or, more likely, narrowed the choice down to a select few places and is simply taking bids to maximize its benefits? Whatever location wins the new project needs to be sure it conducts a thorough cost analysis to learn whether any tax abatements are really worth the cost…

Must-Read: Enrico Moretti: Fires Aren’t the Only Threat to the California Dream: “The fires that ravaged Northern California in October claimed lives, weakened communities and scarred one of the West’s most distinctive landscapes…

…The destruction of an estimated 14,000 homes in the wine country north of San Francisco will worsen a severe housing shortage in a region where rents and housing values are already sky-high. The shortage harms rural communities on the fringes of the Bay Area, but it is rooted in urban communities in the region’s core…. It is exacerbated by well-meaning but misguided housing policies championed by urban liberals. The area has some of the most progressive voters and policymakers in the nation, yet it has also adopted some of the most regressive housing policies, with large costs for low-income renters and the environment….

The problem is largely self-inflicted: the region has some of the country’s slowest, most political and cumbersome housing approval processes and most stringent land-use restrictions. Thanks to aggressive lobbying by an odd coalition of Nimby homeowners and progressives—radical county supervisors, tenants’ unions, environmental groups—in places like San Francisco and Oakland, it takes years (and sometimes even decades), harsh political battles and arduous appeals to get a market-rate housing project approved….

Just like fires, bad housing policies can carry horrendous social and environmental costs. As the smoke from the Northern California fires clears, our urban communities should follow the examples of other progressive cities, and embrace smart growth. For this to happen, local urban progressives must moderate their reflexive opposition to all new market-based housing. The main winners will be the region’s most vulnerable: urban renters as well as the land and inhabitants of areas incinerated by the recent infernos.

Should-Read: Erik Brynjolfsson, Daniel Rock, and Chad Syverson: Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations and Statistics: “We describe four potential explanations for this clash of expectations and statistics…

…false hopes, mismeasurement, redistribution, and implementation…. Lags are likely to be the biggest reason for paradox…. Full effects won’t be realized until waves of complementary innovations are developed and implemented…. National statistics will fail to capture the full benefits… and some may even have the wrong sign…

Should-Attend: Mohamed Saleh and Jean Tirole: Taxing Unwanted Populations: Fiscal Policy and Conversions in Early Islam: “Hostility towards a population, whether on religious, ethnic, cultural or socioeconomic grounds…

…confronts rulers with a trade-off between taking advantage of population members’ eagerness to keep their status and inducing them to “comply” (conversion, quit, exodus or any other way of pleasing the hostile rulers). This paper first analyzes the rulers’ optimal mix of discriminatory and non-discriminatory taxation, both in a static and an evolving environment. It thereby derives a set of unconventional predictions. The paper then tests the theory in the context of Egypt’s conversion to Islam after 641 using novel data sources. The evidence is broadly consistent with the theoretical predictions…

Should-Read: Mark Koyama: The End of the Past: “Temin’s GDP estimates suggest that Roman Italy had comparable per capita income to the Dutch Republic in 1600…

…Schiavone… raises important points that I had fully not considered previously…. Aelius Aristides celebrating the wealth of the Roman empire in the mid-2nd century AD… a panegyric addressed to flatter the emperor but its emphasis on long-distance trade, commerce, manufacturing is highly suggestive. Such a speech is all but impossible to imagine in an predominantly rural and autarkic society. Aristides is painting a picture of a highly developed commercialized economy that linked together the entire Mediterranean and beyond. Even if he is grossly exaggerates, the imagine he depicts must have been plausible to his audience.

In evaluating the Roman economy in the age of Aristides, Schaivone notes that:

Until at least mid-seventeenth century Amsterdam, so expertly described by Simon Schama—the city of Rembrandt, Spinoza, and the great sea-trade companies, the product of the Dutch miracle and the first real globalization of the economy—or at least, until the Spanish empire of Philip II, the total wealth accumulated and produced in the various regions of Europe reached levels that were not too far from those of the ancient world…

This is the point Temin makes. Whether measured in terms of the size of its largest cities—Rome in 100 AD was larger than any European city in 1700—or in the volume of grain, wine, and olive oil imported into Italy, the scale of the Roman economy was vast by any premodern standard. Quantitively, then, the Roman economy looks as large and prosperous as that the early modern European economy. Qualitatively, however, there are important differences….

Roman history leaves no traces of great mercantile companies like the Bardi, the Peruzzi or the Medici. There are no records of commercial manuals of the sort that are abundant from Renaissance Italy… no political economy or “economics”…. The most obvious institutional difference between the ancient world and the modern was slavery. Recently historians have tried to elevate slavery and labor coercion as crucial causal mechanism in explaining the industrial revolution. These attempts are unconvincing (see this post) but slavery certainly did dominate the ancient economy….

Schiavone’s chapter “Slaves, Nature, Machines” is a tour de force. At once he captures the ubiquity of slavery in the ancient economy, its unremitting brutality—for instance, private firms that specialized in branding, retrieving, and punishing runaway slaves—and, at the same time, touches the central economic questions raised by ancient slavery: to what extent was slavery crucial to the economic expansion of period between 200 BCE and 150 AD? And did the prevalence of slavery impede innovation?…

Schiavone suggests that ultimately the economic stagnation of the ancient world was due to a peculiar equilibrium that centered around slavery…. The apparent modernity of the ancient economy—its manufacturing, trade, and commerce rested largely on slave labor…. The ancient reliance on slaves as human automatons—machines with souls—removed or at least weakened, the incentive to develop machines for productive purposes…. There was also a specific cultural attitude….

None of the great engineers and architects, none of the incomparable builders of bridges, roads, and aqueducts, none of the experts in the employment of the apparatus of war, and none of their customers, either in the public administration or in the large landowning families, understood that the most advantageous arena for the use and improvement of machines—devices that were either already in use or easily created by association, or that could be designed to meet existing needs—would have been farms and workshops…

The relevance of slavery colored ancient attitudes towards almost all forms of manual work or craftsmanship. The dominant cultural meme was as follows: since such work was usually done by the unfree, it must be lowly, dirty and demeaning:

technology, cooperative production, the various kinds of manual labor that were different from the solitary exertion of the peasants on his land—could not but end up socially and intellectually abandoned to the lowliest members of the community, in direct contact with the exploitation of the slaves, for whom the necessity and demand increased out of all proportion… the labor of slaves was in symmetry with and concealed behind (so to speak) the freedom of the aristocratic thought, while this in turn was in symmetry with the flight from a mechanical and quantitative vision of nature…

Thus this attitude also manifest itself in the distain the ancients had for practical mechanics:

Similar condescension was shown to small businessmen and to most trade (only truly large-scale trade was free from this taint). The ancient world does not seem to have produced self-reproducing mercantile elites…. The phenomenon coined by Fernand Braudel, the “Betrayal of the Bourgeois,” was particularly powerful in ancient Rome. Great merchants flourished, but “in order to be truly valued, they eventually had to become rentiers, as Cicero affirmed without hesitation: ‘Nay, it even seems to deserve the highest respect, if those who are engaged in it [trade], satiated, or rather , I should say, satisfied with the fortunes they have made, make their way from port to a country estate, as they have often made it from the sea into port. But of all the occupations by which gain is secured, none is better than agriculture, none more delightful, none more becoming to a freeman’” (Schiavone, 2000, 103)…

Such a cultural argument fits perfectly with Deirdre McCloskey’s claim in her recent trilogy that it was the adoption of bourgeois cultural norms and specifically bourgeois rhetoric that distinguished and caused the rise of north-western Europe after 1650….

The most advanced economies of early modern Europe, say England in 1700, were on the surface not too dissimilar to that of ancient Rome. But beneath the surface they contained the “coiled spring”, or at least the possibility, of sustained economic growth—growth driven by the emergence of innovation (a culture of improvement) and a commercial or even capitalist culture. According to Schiavone’s assessment, the Roman economy at least by 100 CE contained no such coiled spring.

We are not yet at the point when we can decisively assess this argument. But the importance of culture and the manner in which cultural and material factors interacted is clearly crucial. The argument that the slave economy and the easy assumptions of aristocratic superiority reinforced one another is a powerful one. For whatever historical reasons these cultural elements in the Roman economy were relatively undisturbed by the rise of merchants, traders and money grubbing equites. Likewise slavery did not undermine itself and give rise to wage labor.

Why this was the case can be left to future analysis. The full answer to the question why this was the case and a more careful consideration of the counterfactual “could it have been otherwise” are topics deserving their own blog post.