Category: Equitablog

Things to Read on the Afternoon of March 13, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

Should Be Aware of:

Afternoon Must-Read: Paul Krugman: Nerds, High Priests, and the State of Economics

Posted on by Brad DeLong

Paul Krugman: Nerds, High Priests, and the State of Economics: “I’ll spend much of this weekend at the New York Review of Books conference on what’s wrong with the economy and economists…

…It’s important, in these things, to ask, ‘Compared to what?’… Leave out the unfortunately substantial number of economists who decided to throw basic macroeconomics out the window; that’s an important story, but a different one…. Talk instead about economists who stayed with more or less standard textbook macroeconomics. How did they do?… Very few saw the crisis coming… failed to understand… the growth of shadow banking… didn’t pay nearly enough attention to household debt…. But these were failures of observation, not fundamental conceptual problems…. We collectively went ‘Aha! Diamond-Dybvig-Irving Fisher yowza!’ and all was clear…. After the crisis struck… the liquidity trap came to the fore, and the sensible half… [said] massive expansion of central bank balance sheets would not be inflationary, large deficits would not drive up interest rates, austerity would depress economies by much more than it does in normal times. These were not obvious…. But they proved right. These past six years… a big win for basic Hicksian macroeconomics…. Consider the people Simon Wren-Lewis calls the ‘high priests’, people who are supposedly ‘close to the markets’ and whose vast experience and intuition grant them insights denied to nerdy economists…. They’ve spent these past six years declaring that we’re going to turn into Greece any day now (and it’s ‘regrettable’ that it hasn’t happened yet), that we can boost the economy by cutting deficits, because confidence. Great calls, guys. Remarkably, as Simon points out, politicians still hang on the words of these high priests…”

Weekend reading

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles we think anyone interested in equitable growth should be reading. We won’t be the first to share these articles, but we hope by taking a look back at the whole week we can put them in context.

Links

Ben Casselman on the difficulty of getting access to administrative data. [fivethirtyeight]

Susan Dynarski on improving graduation rates at community colleges. [the upshot]

“In closing, Europe is the new China and will be the new Japan. Or something.” David Keohane warns us all about the Euroglut. [ft alphaville]

Matt O’Brien warns about the downsides of a rising dollar. [wonkblog]

Frances Coppola writes on negative interest rates and the European Central Bank. [ft]

Cardiff Garcia on what history can and cannot tell us about the future of automation and jobs. [ft alphaville]

Friday Figure

021915-va-incomegrowth

What do Americans think about paying taxes?

Posted on by Bridget Ansel

From the Boston Tea Party to the modern political movement of the same name, one may be quick to think that complaining about taxes is an American pastime.  But are such sentiments truly representative of all Americans? Perhaps not.

Vanessa Williamson, a Ph.D. candidate in government and social policy at Harvard University, and an Equitable Growth grantee, seeks to gain a deeper understanding of American’s attitudes towards taxes. Williamson is best-known for her work on the modern-day Tea Party and the ideology that drives the phenomenon. In her newest research, however, she attempts to capture the sentiments of a broader group of Americans. Williamson believes that, while there is a great deal of research detailing the most efficient or equitable tax policies, that body of research is irrelevant unless it takes the political landscape into account, a landscape that is shaped in large part by public opinion.

Williamson’s work is especially timely in the wake of president Obama’s latest budget proposal, which would raise taxes for the highest earners and expand tax credits for the middle class in an attempt to tackle rising economic inequality. The tax question also remains front and center in the halls of Congress as members begin crafting the budget for fiscal year 2016.

Policymakers on both sides of the aisle must appeal to the American people before they make any substantive changes to U.S. tax policy. So, in this era of inequality, do people see taxes as an investment worth making? To find an answer, Williamson will utilize surveys, interviews, and text analysis to gain a deeper understanding of public opinion on taxes.

Williamson is still compiling survey and interview data, but her preliminary research shows an interesting trend in opinions on taxes expressed in letters written to local newspapers by individuals who identify themselves as a “taxpayer.” After analyzing 1,300 of these letters written between 2003 and 2012, Williamson found that most of these letter-writers refer to themselves as taxpayers as a means to assert a certain status. “This assertion has a democratic flavor with the taxpayer as a kind of ‘everyman,” says Williamson, “but can also be exclusionary in its implications, as writers assert a status over presumed non-taxpayers.”

Williamson finds that 86 percent of those letters do not contain complaints about taxes. Rather, they take issue with other policies perceived to be steering the country in the wrong direction. Only 38 percent of the letters call for an overall reduction in government spending. A majority of Americans may see their yearly payments to Uncle Sam as a democratic duty that allows them to engage in broader policy debates because they have a stake in their country’s well-being—a stake that many people are proud of.

Obviously, these results are preliminary and will be of greater use once they are supplemented by Williamson’s other data. But if her research continues to uncover similar trends, policymakers may need to recognize that the political sentiment in the United States is not entirely anti-tax. Rather, individuals may see paying taxes as a channel through which to engage in the democratic process in a meaningful way.

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Redistribution, stimulus, and U.S. mortgage interest rates

Posted on by Nick Bunker

Redistribution isn’t just about transfers of income up or down the income ladder. It can also be about transfers of value across places as well. Certain U.S. government policies can favor some areas of the country over others, or can shift money from residents of one area to others elsewhere. A new paper released by the National Bureau of Economic Research examines one such policy—the interest rates for mortgages set by the two mortgage finance giants Fannie Mae and Freddie Mac. The setting of these rates by the two government-sponsored enterprises—both now in government receivership—not only redistributes income but also acts as a form of stimulus during economic downtimes

The new paper, by economists Erik Hurst, Benjamin J. Keys, Amit Seru, and Joseph S. Vavra, all of the University of Chicago, zeroes in on the interest rate set by Fannie and Freddie for the mortgage market—a rate that doesn’t vary much at all across the country after accounting for the characteristics of borrowers. This is contrary to the economic expectation that the rate would vary, considering that the probability of the risk of defaulting varies quite a bit across the country. If an economic shock hits an area, the expectation is that the rate increases as borrowers default. But that doesn’t happen.

The authors find that variable mortgage rates based on geography are indeed the case in the private mortgage market, where Fannie and Freddie do not guarantee the mortgages before they are packaged and sold as mortgage-backed securities. It’s by setting the standards and fees they charge to guarantee loans that Fannie Mae and Freddie Mac influence mortgage rates.  So why does the rate set by the two mortgage finance giants not vary? The authors chalk it up to political constraints. They detail a few times when Fannie Mae and Freddie Mac tried to increase borrowing costs for areas with higher default risk, back in 2008 and 2012, but then stepped back from the proposals due to protests from industry groups and consumer advocacy groups.

So what’s the economic impact of this redistribution of income via the mortgage interest rate on Fannie- and Freddie-guaranteed mortgages? According to the authors’ calculations, residents in a region with a lower predicted mortgage default pay the equivalent of a one-time tax of $1,000 per household. For a household in a region with a high expected default risk, they get a one-time subsidy of about $800 per household.

In total, this transfer is about $21 billion. That’s a large number, but it’s less than the federal government spent on unemployment insurance in 2014 ($49 billion), according to the authors. But the total per household transfer of $1,800 from low-risk to high-risk regions is about the same size as the tax rebates the federal government sent out to taxpayers in the immediate wake of the 2001 and 2008 recessions to help the economy recover more quickly.

The comparison to the tax rebate checks is apt not only in terms of size but also in terms of its impact. By making sure that rates don’t go much higher during a recession, the setting of mortgage interest rates on a national scale makes it easier for households in high risk areas to borrow and sustain their consumption. It’s a form of automatic stimulus that helps households handle regional economic downturns.

As the authors point out, this paper isn’t a full analysis of the economic impact of the mortgage market or even the role of Fannie and Freddie in the market. But what it does show is that polices we don’t often consider as redistributive do, in fact, change the distribution of income.

Nighttime Must-Read: Michael Hiltzik: Why Use Years-Old Data to Attack Social Security Disability?

Posted on by Brad DeLong

This looks very bad for Mark Warshawsky and Ross Marchand: using outdated data that misrepresents the current situation is really not something you want to gain a reputation for doing. I’m interested if there is an alternative explanation they would not tell Hiltzik:

Michael Hiltzik: Why did the WSJ use years-old data to attack Social Security disability?: “Mark J. Warshawsky… and Ross A. Marchand…. Warshawsky declined to answer my questions about the piece on the record…

…but referred me to a lengthier treatment he published in Bloomberg’s Pension & Benefits Daily in 2012. First question: Why did Warshawsky and Marchand use case figures from 2008?… Social Security’s own inspector general’s office… found… that the average approval rate has been coming down for years–reaching 56% in fiscal 2013…. Warshawsky and Marchand even allude to… reforms implemented by… Michael Astrue…. In his 2012 piece, Warshawsky… determined that even by 2011 ALJs on average had become significantly stingier. That only makes it harder to explain why the outdated 2008 figure became the linchpin of Monday’s op-ed…. An op-ed that appears to be based on statistics but whose import is political…. Warshawsky and Marchand are right to observe that the disability appeals system needed to be made more efficient and fair…. But calling it ‘a benefit bonanza’? No one thrown out of work by a disability and living on $1,165 month after meeting the program’s stringent approval standards would define it that way.

Afternoon Must-Read: Robert Reich: The Conundrum of Corporation and Nation

Posted on by Brad DeLong

Robert Reich: The Conundrum of Corporation and Nation: “American corporations exert far more political influence in the United States than their counterparts exert in their own countries…

…In fact, most Americans have no influence at all…. Most big American corporations have no particular allegiance to America. They don’t want Americans to have better wages…. I’m not blaming American corporations. They’re in business to make profits and maximize their share prices, not to serve America…. Because of the overwhelming clout of American firms on U.S. politics, Americans don’t get nearly as good a deal from their governments as do Canadians and Europeans…. So it shouldn’t be surprising that even though U.S. economy is doing better, most Americans are not…. What’s the answer to this basic conundrum? Either we lessen the dominance of big American corporations over American politics. Or we increase their allegiance and responsibility to America. It has to be one or the other…

Afternoon Must-Read: Noah Smith: A Tech Bubble or Just a Mistake?

Posted on by Brad DeLong

Noah Smith: A Tech Bubble or Just a Mistake?: “A pricing error is when some people think some asset is worth a lot, and they turn out to be wrong…

…just another day in the financial markets…. A bubble is… where everyone buys at prices they know are inflated because they think they can find… a greater fool out there somewhere. Today’s tech start-up investment frenzy has a very defined chain of resale…. Angels and the crowd funders… venture capitalists… early-stage funders sell when the venture either offer shares to the public or gets acquired…. Initial public offerings are a lot rarer than they used to be… acquired by large companies such as Google, Facebook, Amazon, Apple and Microsoft. So unlike in the 1990s, early-stage investors now know exactly who the most likely end-stage buyers are…. If early-stage investors plan on selling to a ‘greater fool,’ it must be because they think Facebook, Google and the rest are the fools…. Are the big companies making a big mistake?… There seems to be a pretty obvious reason for big tech companies to be paying top dollar for little tech companies: insurance…. All of these companies have to be looking for the next platform with a strong network effect that will draw the eyeballs of the fickle, tech-addicted…. The current situation looks very little like the dot-com bubble of the late ’90s.