Category: Equitablog

Should-Read: I find Jason Furman totally convincing here. Which raises the question: what are those he is criticizing thinking?

More distressing, perhaps, is Jason’s defensive “(warning: irrelevant nerdy thread)”. If economists’ models are worth anything at all, it is only because you take the time to understand them and do them right…

Jason Furman: Wage Increases Under the Unified Framework: Some talk lately of Ramsey models and their implications for wage increases under the Unified Framework (warning: irrelevant nerdy thread)…

…I love the Ramsey model as much as the next person (OK, not as much as Greg or @caseybmulligan) but it has major limitations for this q. Ramsey ignores: (1) transition (2) distribution, (3) financing, (4) Δ interest rate, (5) effective marginal rates & (6) supernormal returns.

TRANSITION: May take a long time to get to the new steady state level. Is relevant because direct changes are sooner, matter more in PV.

DISTRIBUTION. POTUS claim is middle-class better off. Stipulate Greg Mankiw’s toy example is right: $200b corp tax cut, $300b wage increase. The means wages +3% (or $2,000—already below CEA but nevermind). But implicit in model is lump sum financing of $1,600/household. A household making $50,000 and no capital ownership gets a $1,500 wage boost and a $1,600 tax increase—or $100 worse off. Broader point: in model growth comes from replacing distortionary taxes with lump sums. Can’t ignore when evaluating middle class impact. Other models CEA has been pointing to also assume lump sum/other financing—but somehow only TPC gets attacked for filling in details.

FINANCING. Of course the Unified Framework does not have the $1,600 per hh lump sum financing. So it doesn’t have the growth effect either. The Unified Framework has deficit financing. Over time this reduces National Income—through less investment or more foreign borrowing. See, eg, the Penn-Wharton Budget Model of the President’s earlier principles (they have not updated for new plan). You can get different results in different models, is sensitive to when/how financed, but generally cuts or reverses growth effect.

INTEREST RATES. The above assumed that the US is not a small open economy & interest rate not the invariant social rate of time preference. I am very comfortable with those assumptions. I suspect you are too. Enough said.

EFFECTIVE MARGINAL RATES. Much investment is already debt-financed. It faces an effective rate ~0%. Cutting corp rate from 35% to 20% would cut the Effective Marginal Tax Rate by ~5pp give or take a lot. This is one reason why full-scale dynamic analysis of rate cuts with Ramsey models are so much smaller than these toy examples would suggest. If you have expensing and no interest deduction then cutting statutory rates does not reduce the EMTR at all. I know, State taxes, possibility that avg rates affect lumpy location decisions, etc. It is complicated. Point is simple model overstates.

SUPERNORMAL RETURNS. The Ramsey model only has normal/competitive returns to capital. The real world also has supernormal returns/rents. The deleted Treasury study estimated that 63% of corp income is rents—and some evidence rents are rising as concentration grows. In theory cutting taxes on rents will lead to higher after-tax profit but not anything else (“you get what you get and you don’t get upset”). In practice, maybe some of the extra rents shared with workers in a bargaining model. But not much and likely higher-income workers.

CONCLUSION. A lot of ways to look at impact of corp cut on middle class. None of them show middle-class families WAY better off.

Part of the problem here is that Unified Framework is incomplete (legislation will also be incomplete by not specifying future financing). A full(er) specified plan will allow a more complete assessment of the growth/distn/welfare aspects of the plan together. I hope we have time for that complete assessment…

Should-Read: Tim Duy: Incoming Data Supportive of December rate Hike: “If we ignore inflation, then nothing is really standing in the way of a rate hike in December…

…Of course, given that arguably the primary job of a central bank is to meet its definition of price stability, the Fed shouldn’t really ignore inflation. Policymakers, however, would counter that they are not ignoring inflation. They are simply favoring the inflation forecast over actual in ation. And they would further argue they have good cause – with the economy chugging along, it is only a matter of time before resource constraints become evident and price pressures rise. That’s their story, and they are sticking to it…

Should-Read: Sandy Black: U.S. pattern looks very different. Suggests institutions matter and potential role for policy: “New book including my work with @dwschanz on female labor force participation….

…Prime-age (25-54) female LFP improved a lot until 2000. Now declining, similar to that of men. By marital status/children: Upward patterns were different by category, but the steady decline post 2000 is similar across all groups. U.S. pattern looks very different from other developed countries. Suggests institutions matter and potential role for policy. Also interesting: diffs by education/cohort. Pattern for lower educ women (steady decline across cohorts) similar to what we see for men…

Must-Read: Martin Wolf: Zombie ideas about Brexit that refuse to die: “As Mark Carney, governor of the Bank of England, has rightly noted, the initial impact of Brexit will be ‘deglobalisation’…

…not a “global Britain”.

This is self-evident…. Today’s intra-industrial trade, particularly within supply chains… [is not] the inter-industry trade of the 19th century…. In trade today both proximity and regulatory barriers matter. It will be impossible to offset the loss of favourable access to EU markets, which now take some 40 per cent of the UK’s exports. Even to start on this, the UK would have to reach favourable deals with the US, China and India, the actual and potential superpowers. In all such negotiations, the UK will be very much the weaker party. Talks would be brutal.

Yet another zombie is the idea that it will be possible to shift smoothly to WTO terms for trade with the EU…. The last zombie is the idea that those who deny the claims of the Brexiters are “traitors” or “saboteurs” working against “the will of the people”. This is despotism. In a liberal democracy, we are all entitled to our opinions and to seek to overturn what we consider grossly mistaken decisions. The saboteurs are those whose zombie ideas have brought the UK to a ruinous break with its neighbours and natural partners. It is our right to argue this. And we will.

Must-Read: Endorse. The biggest reason not to name John Taylor to run the Fed is his persistent refusal to take any steps to mark his beliefs to market—to perform any kind of view-updating exercise in response to the extraordinary economic troubles of the past decade. That is just not right for anyone claiming to be an economist. And that is doubly not right for anyone being considered for any senior policymaking position. If Taylor is nominated, the Senate Banking Committee should not confirm him:

Noah Smith: Taylor and His Rule Are Not What the Fed Needsg: “How much should the Fed worry about inflation versus unemployment?…

The Taylor Rule contains two number…. When Taylor made the rule, he rather arbitrarily set both values to be 0.5…. When compared to the numbers Taylor picked, it looks like the Fed assigns more weight to unemployment and less to inflation. The Fed’s approach seemed to work fairly well in the 1980s and 1990s…. Only in the Great Recession did this approach seem inadequate — the Fed lowered rates all the way to zero, at which point it could lower them no further (since nominal interest rates can’t go much below zero). Taylor, however, would have done things differently. In a blog post in June 2011 — when interest rates were at zero and the Federal Reserve was contemplating engaging in further rounds of quantitative easing — Taylor wrote that the Fed ought to raise rates instead….

Taylor’s recommendation relied on his original rule, with its original arbitrary round numbers. That rule recommended raising interest rates above zero as early as 2010, and would have had rates at almost 4 percent in 2012. The Fed didn’t take Taylor’s advice. Instead, it kept rates at zero, and continued its program of QE. Inflation, which Taylor warned about, failed to appear. Taylor also warned of financial market volatility if interest rates weren’t raised. But that also failed to appear…. It’s safe to say that the outcome was fairly good. And none of the dangers that Taylor prophesied came to pass.

One would think that Taylor would have reconsidered his more hawkish policy rule in light of these developments. But he continued to defend his version of the rule, and to criticize the Fed’s actions, years later. This apparent refusal to revise his views, combined with a general reputation for monetary hawkishness, probably goes a long way toward explaining why Taylor appeals to the Trump White House…. As Fed chief, it’s impossible to know in advance if Taylor would live up to these expectations of hawkishness…. But if Taylor did let himself be significantly influenced by the rule that bears his name, it would almost certainly push him to raise interest rates above what other Fed leaders like Yellen might choose. And that would pose a danger to the real economy.

Must-Read: Ryan Avent: How should recessions be fought when interest rates are low?: “ONE day… bad news will blow in… a new recession will begin…

…During the next recession, the “zero lower bound” (ZLB) on interest rates will almost certainly bite again…. Broadly, economists see two possible ways out…. One is to change monetary strategy. Ben Bernanke, chairman of the Federal Reserve during the crisis, proposed a clever approach: when the economy next bumps into the ZLB, the central bank should quickly adopt a temporary price-level target. That is, it should promise to make up shortfalls in inflation resulting from a downturn…. If credible, that promise should buck up animal spirits, encourage spending, and drag the economy back to health…. Less clear is whether a central bank could fulfil its promise. The Fed has failed to hit its 2% inflation target for the past five years, after all….

The constraints facing central banks suggest better hopes for the second way forward—greater reliance on fiscal policy. This was the theme of a contribution to the conference from Olivier Blanchard and Lawrence Summers…. Fiscal and monetary policy would have to be closely co-ordinated—amounting, in all likelihood, to a loss of central-bank autonomy…. Just how troubling a loss of independence would be is intensely debated. Messrs Blanchard and Summers are themselves at odds on it….

Central-bank independence was an institutional response to the inflation of the 1970s, just as government business-cycle management was a response to the Depression. But the rules that underpinned the conditions of the 1970s seem no longer to apply…. In the 1970s, an intellectual shift within economics took place in tandem with the change in policy practice. The discipline could explain why predictable monetary policy set by independent central banks was preferable to a government’s attempts to spend its way to full employment. Yet things need not unfold that way this time. With economists at odds as future ZLB episodes loom, the example of the 1930s might be more apt. Then populist politicians struck out in unorthodox new directions, for better and occasionally much worse. It was only later that experts could settle on a coherent narrative of the crisis and recovery. That is not the ideal way forward. Yet it may be the only option available.

Should-Read: The Spectator Index on Twitter: “Total wealth of Forbes 400 list:

• 1982: $93 billion
• 2016: $2400 billion

Nominals, unfortunately: figure a tripling of the world price level and a doubling of global per capita income—to scale it is a factor of four, not 24…

Should-Read: Greg Leiserson: The Unified Framework is a proposal for two new wasteful tax expenditures: “Unified Framework’s core proposal: preferential rates for business income…

…https://equitablegrowth.org/research-analysis/the-unified-framework-is-a-proposal-for-two-new-wasteful-tax-expenditures/ Both comprehensive (integrated) income tax and consumption tax apply same rate to business and non-business income. Widely understood that preferential pass-through rate is a preference; same is true for sharply lower corporate rate.

Best approach: start over, focus on reforms to the tax base https://equitablegrowth.org/research-analysis/in-defense-of-the-statutory-u-s-corporate-tax-rate/.

Current approach: struggle with short list of (existing) tax expenditures, lose revenue (TBD scale), windfalls for wealthy & old capital.

Alt approach: scale back/eliminate the (new) tax expenditure that preferential business rates create via surtax on domestic cash flow. Effectively uses mini DBCFT as an offset for tax reform, rather than larger DBCFT as replacement for business income taxes. Ex: DBCFT as offset for modest corporate rate cut reduces harms (e.g. cost/deficits, sheltering) and reduces regressivity. Smaller scale of DBCFT-as-offset moderates challenges of the border adjustment in the Better Way plan 10/10…