Should-Attend: Heather Boushey: Economics and feminism: “Finding Time: The Economics of Work-Life Conflict…
…interviwed by Lance Knobel. What can now be done as the federal political tide pulls back on advances? Will the increasing outcry about sexism in tech provide a countervailing pressure for change?…
Should-Attend: Alice Rivlin: Evidence and Policy Analysis in the Age of Fake News: “The paradox of current political turmoil is…
…even though we cannot forecast the future in our complex world – that our policy makers and legislators can now access much richer data-based evidence about potential costs and effects of policies more than ever possible before. Yet public data, policy analysis, and the institutions that produce them are under increasingly strident partisan attack. Dr. Rivlin will speak on how evidence-based practitioners got into this tough situation, and how we can Improve It.
Should-Attend: Library/CTL: Making Textbooks and Course Readers Affordable: “Panel Discussion | October 27 | 11 a.m.-12:30 p.m. | Wurster Hall, Environmental Design Library Atrium…
…Brad DeLong, Professor of Economics; John Wallace, Lecturer, Japanese Program; Daniel A. Rodriguez, Professor of City & Regional Planning; Ani Adhikari, Teaching Professor, Statistics. Sponsor: Library. Can students afford to take your class? Textbook prices have risen 88% in the past decade, and many textbooks cost well upwards of $200. Print course pack costs further compound students’ financial burdens. What would student success and retention be like if an enrollment barrier—the cost of textbooks and course readers—were reduced or eliminated? Do you wonder how to make your class more affordable, and how much time effort you’d need to invest? Come to this panel discussion to find out.
The University Library and Center for Teaching and Learning have partnered in an innovative pilot program to reduce course content expenses and incentivize the creation of high quality, free, and open course materials. In this panel event, you’ll hear from participating faculty and lecturers who will discuss their experiences and provide tips from the leading edge of course content affordability.
Refreshments will be provided. Open to UC Berkeley faculty, staff, and students. RSVP strongly encouraged: http://bit.ly/1027ACC
Tomorrow morning, the Bureau of Economic Analysis will announce its first estimate for third quarter gross domestic product growth in 2017. A lot of time and energy will be spent interpreting this number. The third quarter rate will be compared to past growth and to GDP growth in other countries. Politicians will take credit or assign blame. It will be trumpeted as the one number that tells us what’s really happening in the economy.
Be skeptical. No single number can really tell us much of anything about our immensely complicated $19 trillion economy. But we have been conditioned to think about the health of the economy in terms of total output growth. We know these common refrains: “A rising tide lifts all boats” and “growing the pie.” Economic plans are based on GDP growth targets. So, it’s understandable that so many people treat this one number as somehow sacred.
But reverence for GDP is harmful because GDP growth can be a deeply misleading way to think about the health of our economy. For example, we might think of 5 percent growth as representing an extraordinarily healthy economy. But to demonstrate why that might not be the case, we’ve put together the infographic below, which shows two possible ways that an economy might achieve 5 percent growth.
In scenario 1, growth is inequitable, but at least everyone is benefitting somewhat. Earners at the bottom see growth of 2.8 percent, while those at the top see growth of 10 percent. In this scenario, GDP is misleading, because 50 percent of the population saw much lower growth than the headline number would suggest.
In the second scenario, however, the topline number is truly and deeply out of sync with the experience of the average American. Again, growth for the economy is 5 percent, but now 90 percent of the population does not share in that growth at all. The bottom 50 percent of earners actually see their incomes reduced by 4 percent, while the next four citizens on the income ladder see complete stagnation. The only person who benefits is the richest member of society, who sees 17 percent growth. Seeing the headline GDP growth number, nine-tenths of this society might reasonably wonder on what planet government economists were living.
In fact, the second scenario is not imaginary. Consider the “double dip” recession of the early 1980s. In late 1980, GDP growth made it seem like perhaps the then-6-month-long recession was over. In reality, top incomes had surged, producing the illusion of growth, while incomes for those outside the top 10 percent had stagnated or fallen.1
Measuring the health of our economy is important. The problem with GDP growth isn’t that we shouldn’t be doing it at all but rather that we should be doing much more. Instead of publishing a single number, the Bureau of Economic Analysis could publish a range of numbers reflecting the varying fortunes of people with different incomes, living in different geographic regions, and from different ethnic and racial origins. Doing so might require Congress to expand BEA’s mandate. But the one-number-fits-all mentality of GDP growth is past due for rethinking.
Should-Read: Alan Auerbach: Understanding the destination-based approach to business taxation: “The rising importance of multinational companies and the changing nature of production represents a challenge to the traditional ways that countries try to tax corporate profits…
…This column examines one potential policy response – a destination-based cash-flow tax…. A fundamental tax reforms that can deal more adequately with the new economic realities…. builds on the concept of business cash-flow taxation…. A destination-based cash-flow tax (DBCFT)… adds ‘border adjustment’ to cash-flow taxation and has the effect of basing the tax on the location of consumers rather than on the location of profits, production, or corporate residence. As described in a series of papers, including Auerbach (2017), converting an origin-based cash-flow tax into a destination-based cash-flow involves relieving tax on export revenues and imposing tax on imports, in precisely the same manner as is done under existing value-added taxes (VATs). The key difference from a VAT is that the DBCFT maintains the income tax deduction for wages and salaries, and thus amounts to a tax on domestic consumption not financed by labour income, in principal a much more progressive tax than the VAT….
There is little doubt that a large border adjustment can lead to large real exchange rate responses, through some combination of nominal exchange rate appreciation and domestic price and wage increases. Under simplifying assumptions, the Lerner symmetry theorem predicts that such responses should neutralise any effects on trade. But there are many possible complications to the analysis…
Is a sufficiently revitalized social insurance state and public infrastructure and other public goods provision system what we really need? That is a very difficult and a very hard question.
Let me give a particular partial answer to it. My decision to give this partial answer is, I think, motivated in large part by my perception that the six of us here on this panel agree on too much. There is insufficient Dixit-Stiglitz variety up here on the panel for it to be in any sense optimal.
Therefore let me, for the moment, fly my rootless neoliberal cosmopolite freak
flag. Let try to push back a little against the idea that a better social
insurance state is all we need.
If you think about say the people of rural and semi-rural Kentucky, facing the continued long-term decline of their regional resource-based export industries and increasingly facing global competition for manufacturing industries in which their principal advantage within the United States was a relatively low real wage level, and if you ask “what could have been done to make their lives better over 2009 to 2016”, the answer would have been: Obamacare. Give them health insurance. Give them access to the health care system in a manner that does not require them to risk bankruptcy in order to see a doctor. The Democratic Party did that. And they turned out.
It is true that many of them have spent 2017 in wonder, staggering around, telling reporters that they really don’t think Trump will get rid of their Medicaid, or make their Exchange policy either unaffordable or so riddled with coverage holes that it is nearly useless. But they voted for Trump. And they will vote for Trump again.
Material standards of living—the opportunity to earn enough money so that you can purchase the things you need—is not really what is going on, is it? Making insurance affordable was a huge material standard of living win, wasn’t it?
Well, you may say, it is economic insecurity. But back up. In America the job-finding and job-separation rates are 3 percent per month. 20 percent of all workers change or lose or find new jobs each year. The US is a country with
high job turnover for a great many people. Yet that turnover, and the uncertainty that it generates, has never been a subject of particular extraordinary.
What does seem to be the subject of particular extraordinary concern are the concentrated region-industry shocks. We have had five of these since the 1930s:
Of these five shocks, three were due to international trade: the Reagan
deficit shock, the oil price shock, and the China shock. The right-to-work shock and the southern textile shock were internal to the United States.
What we really need is an analytical grammar: some explanation for why some
of these shocks produced powerful and awful and destructive resonances in
our politics, and others did not. They all—save NAFTA—were concentrated region-industry shocks. They all were driven by the workings of the market. They all devastated communities.
What can we economists do right now to be useful, as far as policy is concerned?
I believe that we economists can do very little, right now, to materially affect policy. Joe Stiglitz is an economist. Joe Stiglitz was in fact the chief economist in the late 1990s. Joe Stiglitz then argued that TRIPS was a bad idea. It enriched not America but rather the holders of pharmaceutical patents. It did so at the cost of charging poor countries like Vietnam and Congo through the nose for intellectual property that was non-rival in some very basic sense, and for which the appropriate market price was zero. Joe Stiglitz lost that argument. USTR does not regard its mission as primarily that of promoting the health of the world or even the U.S. economy.
One thing we should be doing is laying the groundwork for some future day in which we can affect policy. We should be pushing very hard right now developing arguments for an expanded public sector—a public sector that will produce real marginal cost pricing for things that are non-rival, or perhaps liable only because of increasingly sophisticated and onerous layers of legal “protectionism”, but that somehow is not called “protectionism” because it is not concerned with movements of goods. Why it does not count as “protectionism” is a mystery to me.
At this point I want to incorporate-by-reference the entire works of Dean Baker, and then stop.
Must-Read: Will Wilkinson: Public Policy after Utopia: “That all our evidence about how social systems actually work comes from formerly or presently existing systems is a huge problem for anyone committed to a radically revisionary ideal of the morally best society…
…The further a possible system is from a historical system, and thus from our base of evidence about how social systems function, the more likely we are to be mistaken about how it would work if it were realized…. There’s basically no way to rationally justify the belief that, say, “anarcho-capitalism” ranks better in terms of libertarian freedom than “Canada 2017,” or the belief that “economic democracy” ranks better in terms of socialist equality than “Canada 2017.” You may think you can imagine how anarcho-capitalism or economic democracy would work, but you can’t. You’re really just guessing—extrapolating way beyond your evidence…. This is a general problem. But it does hit especially hard for those who appreciate the unpredictability of complex systems and the inevitability of unintended consequences…. Expert predictions about the the likely effects of changing a single policy tend to be pretty bad…. Our predictions about the outcome of radically changing the entire system are unlikely to be better than random. If your favorite system is quite a bit different from any system that has existed, then even if it were true that it would rank numero uno in terms of your favorite normative standard, you’re not in a position to rationally believe it…. This is a hard lesson for ideologues to swallow….
It is intellectually corrupt and corrupting to define liberty or equality or you-name-it in terms of an idealized, counter-factual social system that may or may not do especially well in delivering the goods. Commitment to a vision of the perfect society is more likely than not to lead you astray…. For me, the death of ideal theory has meant adopting a non-speculative, non-utopian perspective on freedom-enhancing institutions…. What we need are folks who are passionate about freedom, or social justice (or what have you) who actively seek solutions to domination and injustice, but who also don’t think they already know exactly what ideal liberation or social justice look like, and are therefore motivated to identify our real alternatives and to evaluate them objectively. The space of possibility is infinite, and it takes energy and enthusiasm to want to explore it….
Nobody will fight for what works if the people who will fight are blind to what works, or if the people capable of seeing what works don’t have the imagination to look for it, or won’t fight for it if they see it. I think this is what makes Niskanen different. We’ve put misguided, utopian idealism behind us, but retain the moral passion that once attracted most us to radicalism, and have channeled it into discovering and fighting for what is most likely to actually work to make our society freer, more prosperous, and more just.
Should-Read: Music to my ears…
Paul Krugman: On Twitter: “Brad is right here: “Brad is right here…
…Mankiw et al have clearly made a math error. Take the framework I did here:
Paul Krugman: Some Misleading Geometry on Corporate Taxes: The stock of capital on the horizontal axis and the rate of return on capital on the vertical axis. The curve MPK is the marginal product of capital…. The area under MPK… is… total output…. A given world rate of return r… the government imposes a profits tax at a rate t, so that to achieve a post-tax return r domestic capital must earn r*/(1-t). And in the initial equilibrium that requirement determines the size of the domestic capital stock…. Real output is a+b+d. Of this, d is the after-tax return to capital, b is profit taxes, and a – the rest – is wages. Now imagine eliminating the profits tax…. The capital stock rises by ∆K, and so does GDP, to a+b+c+d+e (of which, however, e is returns to foreign capital, so GNP doesn’t rise as much as GDP.) Profit taxes disappear: that’s a revenue loss of b. But wages rise to a+b+c, a gain of b+c…
Assume that the MPK curve makes a right angle:
Then c and e disappear: it’s just the areas a, b, and d. It’s immediately apparent that the wage gain = cut in profit tax, end of story.
Add realistic complications, and wage gain clearly < tax cut. We all make mistakes, but funny how this mistake went in “right” direction
Good to have someone reassuring me that I am not, after all, insane, and can, still, do math and baby analytic geometry.
Remember:
I seem to have a disagreement with Jason Furman here:
@paulkrugman: Brad is right here: Mankiw et al have clearly made a math error
@jasonfurman: Not seeing the math error. Mankiw said static. His soln is right for static (defined as unchanged base)… And dynamic version is higher.
I was taught the definition of “static” by the Jedi Masters at OTA in the early 1990s, on those rare occasions when they would deign to provide oracular pronouncements to those of us in OEP trying to understand their work. The Jedi Masters insisted that “static” analyses were those that did not incorporate what were essentially political-ideological views about the effects of policy changes on GDP. “Static” thus means stable overall capital stock and GDP growth paths.
But that does not mean that “static” analyses assumed no changes in behavior. OTA strongly believed that people responded to tax law changes. Income would be shifted from one category to another. Asset prices would change. Thus tax bases would vary.
Thus, Jason, when you say “Mankiw said ‘static’. His soln is right for static (defined as unchanged base)…” you give the game away. “Static” has never—not in OTA-land, JTC-land, CBO-land, or OMB-land—been defined as an “unchanged [tax] base”.
If you want to say: “In addition to making the inappropriate modeling choice of taking the US to be a SOE, and in addition to setting forth an incomplete model in which the policies that close the hole in the government budget constraint are ignored, Mankiw also cooks up his own definition of ‘static’ that does not apply to OTA or JTC analyses…” then be my guest.
But if you want to allow people to think that Mankiw’s “static” has something to do with the revenue loss estimates that will be produced by JTC, I do not think that’s wise…
Note: Yes, the “dynamic” ratio of dw/d(TR) is higher than OTA’s or Mankiw’s “static” ratio. My point is that in Mankiw’s (poor choice of model) SOE setup, OTA’s dw/d(TR) = 1 by necessity: that’s what no rents and fixed required rate of return on capital get you. And Mankiw’s dw/d(TR) = 1/(1-t) is not a fact about the world—about how their are efficiency gains from cutting tax rates that flow to labor when you assume 100% of the incidence of the CIT is on labor—but is an artifact of his assumption that “static” means not just a fixed capital stock but fixed asset prices and returns.
I think that—as former political appointees who owe the career staff at OTA a great deal—our proper response to Mankiw should be “he gets ‘static’ wrong”, rather than letting Mankiw define “static” as he wishes and thus introduce confusion with respect to what OTA and JTC are doing. But it is clear that opinions differ here…