…which none of us can deny is the outstanding conundrum of today. We all agreed that, whatever the best remedy may be, we must reject all those alleged remedies that consist, in effect, in getting rid of the plenty. It may be true, for various reasons, that as the potential plenty increases, the problem of getting the fruits of it distributed to the great body of consumers will present increasing difficulties. But it is to the analysis and solution of these difficulties that we must direct our minds.
Category: Equitablog
Assessing the Affordable Care Act
Anybody get to this? What was said that was unexpected?
April 14, 2015 :: 9:00 AM – 12:00 PM EDT :: Brookings Institution
Washington, DCThe Patient Protection and Affordable Care Act (PPACA), most commonly known as the Affordable Care Act (ACA), is one of the most important pieces of legislation enacted into law and implemented by the federal government in a generation. The ACA is also one of the most complex and comprehensive efforts to reform the American health care system and reduce costs. Now that the ACA is five years old, how successful has the law been in meeting its primary goals? What has been its efficacy in transforming American health care? What have been the major outcomes and unintended consequences? And what might the future hold for this law, given today’s political environment and a pending, major U.S. Supreme Court decision that could determine the ACA’s fate? On April 14, Governance Studies at Brookings will host a forum to examine the ACA five years after its passage…
Bruce Bartlett’s Complete History of the Laffer Curve from Ibn Khaldun to Ronald Reagan
If you haven’t read Bruce Bartlett’s complete history of the Laffer Curve, you should. The upshot is that you do not need special circumstances for high tax rates to be capable of inflicting significant damage on the underlying economy. But you do need exceptional circumstances to actually get a free lunch out of the Laffer Curve…
Bruce Bartlett:
- The Laffer Curve, Part 1: “The Laffer Curve… economist Norman Ture, who worked closely with Rep. Jack Kemp, probably had more to do with popularizing the idea of a tax cut that could pay for itself than economist Arthur Laffer did…”
- The Laffer Curve, Part 2: “The Laffer Curve from the Middle Ages through the 19th century. It begins with the work of Muslim philosopher Ibn Khaldun in the 14th century, whose work came to the attention of economist Robert Mundell in 1971. Mundell brought it to the attention of journalist Jude Wanniski of the Wall Street Journal. Ronald Reagan mentioned Khaldun by name on 11 different occasions as an influence on his thinking…. Jonathan Swift… observed in 1728 that higher tariff rates often led to a decline in revenue. Adam Smith, David Hume, Alexander Hamilton, Jean-Baptiste Say and James Madison are just a few of those who cited Swift…. [In] 19th century tariff history and notes that discussions of the revenue impact of changes in rates of duty often invoked Laffer Curve arguments…”
- The Laffer Curve, Part 3: “Treasury Secretary Andrew Mellon often invoked Laffer Curve arguments in the 1920s. In the 1930s, economists John Maynard Keynes and Joseph Schumpeter made such arguments. In the 1960s, John F. Kennedy used the Laffer Curve to justify his 1963 tax proposal…”
- The 1981 Tax Cut After 30 Years: What Happened to Revenues? by Bruce Bartlett :: SSRN: “The Reagan tax cut. Republicans often assert that it was so expansionary that there was no revenue loss, something the Reagan administration itself never claimed…. The tax cut lost a lot of revenue, but helped the economy transition from high inflation to low inflation at an unexpectedly low economic cost…”
- Reagan’s Forgotten Tax Record: “Although Ronald Reagan is best known for cutting taxes, he also enacted many tax increases both as president and governor of California…. Reagan’s tax increases… were quite substantial…”
Ezra Klein of Vox.com vs. Tom Standage of The Economist
Basically, however much money http://vox.com asks me for, I will pay it gladly. Not so with http://economist.com.
Here’s why:
…Everything I wrote, I wrote in the hopes that someone else would take it and try to use it on their site, with a link back to my site. The lesson of that, to me, was that writing on the internet is a positive-sum endeavor: I was creating content that helped other people make their sites better, and in using that content, they were helping me grow my site. Vox’s approach to aggregation–which Nate Silver criticized today on Twitter–is informed by that. Our policy, to our staff, is simple: any time we use work created by someone else, we need clear attribution to the original author and a link back to the source. When appropriate, we should do more than that: we should add to the conversation with new facts, ideas, or reporting.
The problem comes when we do it poorly–and in those cases, we deserve to get called out. Take the post that frustrated Silver. The attribution there was clear…. The post went on to argue with Silver…. This wasn’t just aggregation…. The graphic itself included a FiveThirtyEight watermark…. But the post didn’t include a link. This was carelessness, not malice, but it’s a violation of Vox’s internal standards…. Silver’s right to be upset… He has my apologies….
Aggregation has been around a whole lot longer than Google. Time magazine, for instance, began its life as an aggregation shop…. If you read Alan Brinkley’s biography of Henry Luce, you’ll find a furor that feels very familiar…. I helped to create Know More, a site dedicated to aggregating in a more ethical way. We wanted a way to make clear that even when something is aggregated well, that doesn’t mean there’s not much more information at the source… a big ‘Know More’ button that would lead people back to the original source to, well, learn more….
While aggregation has always been a clear service to readers, it can be enormously frustrating to writers…. But aggregation, when done correctly, offers value to the original source…. This informs Vox’s policies…. We want people to talk about our work, put it elsewhere, spread the Vox word. We’re currently working on products that will make it even easier for other sites to use our work…. This stuff is complex, and we don’t always get it right. So if you ever feel Vox isn’t using your work in the way you’d want, email me at ezra@vox.com and let me know. Our intention is always to do things in a way that is positive-sum, and if you ever feel we’re failing that ideal, we want to know, and we’ll work with you to change it.
…Espresso is again meant to be the daily desert-island briefing…. What we wanted to be was forward-looking — to give you the feeling of being ahead of the news, ‘this is what’s coming up today, and look out for this.’ Another aspect of it is… that we don’t do links…. If you want to get links you can get them from other people. You can go on Twitter and get as many as you like. But the idea was… you can get to the end of it without worrying that you should’ve clicked on those links in case there was something interesting…. We’ve clicked on the links already and we’ve decided what’s interesting, and we’ve put it in Espresso.
That’s the same that we do in the weekly as well–we’re not big on linking out. And it’s not because we’re luddites, or… don’t want to send traffic…. It’s that we don’t want to undermine the reassuring impression that if you want to understand Subject X, here’s an Economist article on it–read it and that’s what you need to know. And it’s not covered in links that invite you to go elsewhere. We’ll link to background, and we’ll link to things like white papers or scientific papers and stuff like that. The idea of a 600-word science story that explains a paper is that you only need to read the 600-word science story–you don’t actually have to fight your way through the paper. There is a distillation going on there.
That’s a big thing that we’re focusing on. How else can we apply the same values–which is the distillation and the finishability, the trend-spotting and the advocacy–how else can we apply them to new areas? So we have various things that are on the boil…
Now I read something like this from the very sharp Tom Standage, and my visceral reaction is strong and threefold:
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Whatever the Economist wants to do, it will do it without my subscription or–if I remember to fire up AdBlock before visiting its website–the ability to sell my eyeballs to anyone.
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Whatever the Economist wants to do, it will do it without any links back from me to them. My links are reserved for fellow gift-exchange participants in a merit-of-ideas-based positive-sum game–not for people whose business model is rather parasitic.
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In fact, I hope the Economist fails: the world is full enough of cocksure people suffering from the Dunning-Kruger effect, and the Economist’s business model seems to be to create as many more of them as it can via providing its readers with the knowing false “reassuring impression” that a 600-word Economist article is all someone needs to know.
Is this reaction on my part too extreme? Irrational? I don’t think so. What would you do with a butcher whose business model was explicitly, publicly, and proudly to rig its scales so that they registered 15 oz. as a full lb.?
It seems to me that is what Tom Standage is promising to do…
Over at Grasping Reality: Ibn Khaldun on the Laffer Curve
Over at Grasping Reality: : Muqaddimah:
36. Taxation and the reason for low and high tax revenues): It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments…
Must-Read: Max Sawicky: Work Makes Fritos
…but Vox’s Dylan Matthews brings something news to the table, pointing to the contemporary Democrats’ default anti-poverty policy: get people into a job, any job. Translated that means work supports for jobs with very low pay and scant prospects for upward mobility. The genesis of this policy was the so-called Personal Responsibility and Work Opportunity Reconciliation Act of 1996, also known as “welfare reform.”… From 1996 to 2000, most of the evidence on TANF, with one important exception, showed up positive. Poverty decreased, employment and wages increased. The problem for evaluation is that this same period happened to be one of the best in U.S. history, in terms of labor market advance. In addition, the minimum wage (in 1996 and 1997) and the Earned Income Tax Credit (in 1993) increased. This makes it hard to isolate any beneficial effects of TANF. Unfortunately, the positive signs for those in the bottom income quintile (20%) of the population have crumbled since 2000. Truth is, they weren’t that positive to begin with. The impact on work in “leavers” studies (where TANF recipients were tracked after graduating from the program) tended to show work effects in the high teens. Think about that for a second. You’re working, say, one week a month. You increase work (assuming you have the option) by the top of the range, 20%. Instead of working five days a month, you work six days. Twelve extra days a year. Nor does work necessarily mean higher income, since increased earnings offset benefits, and work expenses reduce net income. The other ominous, early sign was income decline for the poorest single mothers’ families, documented by the saintly Wendell Primus and colleagues. (Primus actually resigned from his post with the Clinton Administration after the welfare was signed. How often do you see that.)…
At the time I hoped that the reform might cast a different light on welfare recipients. Instead of being bums, they would be workers. But enrollment in TANF has dropped off the table. Meanwhile, Barack Obama is slurred as “the Food Stamp president.” So the meanness has not dissipated, it has just been redirected…. All this is a lengthy prelude to Matthews’ post. His remedy for a future of lousy jobs is the UBI…. You’re not as much at the mercy of employers…. The chief benefit of the ‘exit’ option is the implied upward pressure on wages. So far, so good. But Matthews’ thrust is actually more radical than that. He is throwing shade on the moral obligation and axiomatic economic imperative of work itself, in particular employed work…. Let’s desacralize work. Dignity of work, my fanny. Work that is truly voluntary would be nice. Work that is compelled as an alternative to destitution does not comport with any reasonable concept of dignity. It’s like the dignity of kicking back to Tony Soprano…
Must-Read: Pro-Growth Liberal: Jeffrey Sachs’ Feeble Defense of David Cameron
Finally, there is output growth. In the UK, real (inflation-adjusted) GDP fell by 3.8% from the fourth quarter of 2007 to the second quarter of 2010. It then rose by 8.1% from that point until the fourth quarter of 2014. In the US, real GDP fell by 1.6% from the fourth quarter of 2007 to the second quarter of 2010, and then rose by 10.5% from then until the fourth quarter of 2014. Thus, both countries have experienced moderately high and broadly similar growth rates since May 2010, when Cameron’s government took power.
I have no idea what Paul Krugman did to tick off Jeffrey Sachs so I’ll let him speak for himself. But let’s note the fact that the real GDP in the US was a mere 8.7% higher in 2014QIV than it was in 2007QIV. That is by any measure a terrible economic performance. We should also note that real GDP in the UK has increased only 3.7% over the same period. For anyone to suggest that such a dismal economic record justifies fiscal austerity leaves me wondering where this person learned their macroeconomics.
From my perspective, the remarkable–and remarkably stupid–thing we see here is Jeffrey Sachs’s belief claim that U.S. economic performance since the second quarter of 2010 has been in any sense praiseworthy, and that a government that accomplished that is worth voting for.
It hasn’t.
And the reason that it hasn’t has been (a) extraordinary state- coupled with moderate federal-level fiscal austerity, (b) the failure of the Obama administration to use its housing-finance regulatory powers as tools of macroeconomic management, and (c) the unwillingness and perhaps inability of the Federal Reserve to take up the slack.
In the United Kingdom, the Prime Minister who possesses a majority of the House of Commons is the government: Cameron rules fiscal policy, regulatory policy, and monetary policy. Cameron bears responsibility. In the United States, since the second quarter of 2010 Obama has had no power to pass additional fiscal stimulus and no power to reshape the FOMC. Only housing regulatory policy was under his control. Obama gets to claim nearly-full responsibility for the relatively good things. But Obama has to share only a portion of the blame for the bad things.
Today’s Must-Must Read: Gavyn Davies: Who Is Right About the Equilibrium Interest Rate?
…This justifies a large part of the rate increase shown in the dots chart, a view also explicitly stated by Ms Yellen in her speech on policy normalisation. Mr Summers agrees that the Fed will be forced to deliver the equilibrium rate most of the time, but argues that it cannot do so at the moment because of the zero lower bound…. Summers implies that the equilibrium real rate is not only extremely low… [but] may stay there for many years, thus failing to validate the rise in the equilibrium rate implied by the Bernanke/Yellen view. One interpretation of the market’s pricing of forward short rates is therefore that investors lean on the side of Mr Summers…. The resulting abnormally low real bond yields are obviously a critical under-pinning for buoyant asset prices…. If the FOMC were to make it crystal clear that investors are just downright wrong about the forward path for interest rates, the resulting correction in both bond and equity markets could be severe….
The FOMC… are certainly willing to publish the dots, and to spell out their views on the most likely path for the equilibrium real rate. But they are far from ready to risk a major disruption in the markets by telling investors explicitly that they have misjudged the hawkishness of the Fed. Why is this? Presumably it is because the Yellen camp concedes that there is great uncertainty about the equilibrium real rate…. The Bernanke/Yellen belief that the equilibrium rate will rise in the next 3 years as headwinds diminish is at best conjectural….
What would cause Ms Yellen to act more decisively by ‘shocking’ the market’s path for forward short rates? The equilibrium rate is not directly observable, and is very hard even to estimate within a narrow range. This invites caution. The only reliable signal that the equilibrium rate is rising would be upward pressure on inflation. The so-called ‘whites of their eyes’ policy stance, supported by Mr Summers and several members of the FOMC, would therefore wait until there is clear evidence of rising inflation before becoming confident that the equilibrium rate is rising. Fortunately for global asset prices, Ms Yellen is not yet willing to oppose that point of view with any real conviction.
Intangible assets and the labor share of income
Here are a few trends that have been going on in the United States over the past several decades: The share of income going to labor has declined. Corporate profits as a share of the economy have increased. And net investment (outside of the construction industry) has stagnated. Explaining all three of these facts in one coherent story about what’s happened to the economy since the late 1970s doesn’t necessarily fit with a few well-known hypotheses about the relationship between labor and capital.
First, take the research of Loukas Karabarbounis and Brent Neiman, both of the University of Chicago. In their view, the share of income has declined because capital has become less expensive due to technological progress. Computers have become much cheaper, so companies have responded by buying more computers and displacing workers. In economic models, this would require the elasticity of substitution between capital and labor to be greater than 1. In other words, companies being able to readily switch between capital and labor.
Karabarbounis and Neiman’s hypothesis makes sense when accounting for the decline in the labor share. But if that share were going down because firms were buying more capital equipment such as computers, then investment would be increasing as a share of the economy. But it’s not. We know that the price of investment goods is declining, so it looks like firms are just keeping the savings from the decline in the prices instead of investing more. That would explain the increasing profit share as well.
While the mechanics of how the labor share decreased are different, Research by Thomas Piketty of the Paris School of Economics also depends upon the elasticity of substitution between capital and labor to be greater than 1 to show that the labor share of income is declining, but he posits different reasons for this happening. His mechanism is that the rich increasingly save their income and the resulting deepening in capital results in a declining labor share. In his research with Gabriel Zucman of the London School of Economics, Piketty finds an elasticity greater than 1, but like Karabarbounis and Neiman, this result comes from looking at macroeconomic aggregates.
When the elasticity is estimated at a micro level, however, it looks like the elasticity is lower than 1, meaning that switching capital investments for human labor is not as productive. Ezra Oberfield of Princeton University and Devesh Raval of the Federal Trade Commission looked at how individual firms substitute between labor and capital and built that up to an aggregate elasticity that is less than 1. Yet they also found that the labor share has declined.
What could explain a declining labor share with an elasticity lower than 1? A look at the assets of corporations reveals a potential answer. Economist Robin Hanson at George Mason University reports on data that shows that 5/6ths of market valuation of the S&P 500 companies are now “intangible assets” such as patents and trademarks, intellectual property and, importantly in this case, brand names and business methodologies.
To understand this concept, imagine that you want to replicate a company. Let’s say it’s Facebook. You go out and buy all the assets of the company: servers, real estate, and the firm’s employees. But Facebook’s large amount of “intangible assets” means that if you purchase all these physical assets you’d only have a firm that was less than the original firm. The original Facebook obviously has something intangible that can’t be replicated. For the S&P 500 overall, the replicated firm would only be worth 1/6 of the original firm.
Hanson runs through potential explanations for why these intangibles have increased in importance. They include patents, branding, and monopoly power. His colleague at George Mason University, Tyler Cowen, does warn that part of this increase in intangible assets could be from measurement error, but still it seems that any one of these reasons would mesh with the three theoretical explanations above about why capital investments are low yet the labor share of income is still declining (with an elasticity below 1).
Especially when it comes to monopoly power, increased profits and stagnant investments are the sign of monopolies. In his widely read research on the labor share, Massachusetts Institute of Technology PhD. student Matt Rognlie points to a potential increase in market power among companies.
If market power is a significant reason for the increase in intangibles, then this means economists need to focus on understanding how market power and monopolies work in the modern age. Can we do anything about the natural monopolies that arise from social networks companies? Would we want to? Those and many more questions would have to be dealt with.
Things to Read on the Evening of April 12, 2015
Must- and Should-Reads:
- Afternoon Must-Read: Job Turnover and Workers’ Wellbeing :
- “I finished Inequality: What Can Be Done? by Tony Atkinson, and think it’s great. If you’re only going to read one book on the subject, this is more useful than Piketty…. His main focus is how firms make these choices and exercise their market power. What constraints do they face? This depends on the state, and on corporate governance, and on finance. All of these offer paths to influencing income distribution…” :
- Draghi’s Doom Loops: More than Just the Euthanasia of the Rentiers :
- A Theory of the Consumption Function, With and Without Liquidity Constraints (2001):
Might Like to Be Aware of:
- “‘Climate change is going to lead to overall much drier conditions toward the end of the 21st century than anything we’ve seen in probably the last 1,000 years,’ said Benjamin Cook…. But despite the drier conditions and the apocalyptic headlines, California is unlikely to become a parched, uninhabitable hellscape, experts say…” :
- Morning Must-Read: The American Prospect 25th Anniversary
- Today’s Must-Must-Read: What Causes Recessions? :