Category: Equitablog

Must-Read: Melissa S. Kearney: How Should Governments Address Inequality?: “Putting Piketty Into Practice…

…Capital in the Twenty-first Century… by… Thomas Piketty… examined the massive increase in the proportion of income and wealth accruing to the world’s richest people…. Policymakers would be able to make better decisions about “soaking the rich” if they had a clearer sense of the tradeoffs involved. In After Piketty, three left-of-center economists—Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum—have curated an impressive set of essays responding to Piketty’s work and taking a few steps toward answering those questions…. The essays put Piketty’s arguments into a broad historical and intellectual context and highlight some noteworthy omissions that call into question his book’s most dire predictions. At the end of the volume, Piketty himself weighs in. The result is an intellectual excursion of a kind rarely offered by modern economics….

To more fully answer the questions Piketty’s book raised and to start crafting policies to tackle growing inequality, economists and policymakers need to know much more than they currently do about the causes and consequences of today’s concentration of wealth at the top… enhance the skills and opportunities of the disadvantaged… pursue tax reform and changes to corporate-governance rules that will create more shared prosperity. But policymakers also need to avoid steps that would impede innovation and productivity….

[For] the bottom 90 percent… technology, trade, unionization, and minimum wages have shaped… fortunes…. Less well understood are the causes of the tremendous surge in income among extremely high earners, meaning the upper 1.0, 0.1, and 0.01 percent. From a policymaking point of view, the most important question is how much of the ultrarich’s income reflects activity, such as technological innovation, that benefits the broader economy…. There are likely compelling reasons to raise the top income tax rates—as a way of funding public services and investing in infrastructure, for example. But policymakers would be able to make better decisions about “soaking the rich” if they had a clearer sense of the tradeoffs involved…. In Piketty’s view, the primary factors driving the rise in executive pay at the top are not technology or imperfect markets but eroded social norms, questionable corporate-governance practices, and declining union power. Tyson and Spence favor more research to weigh the relative impact of market forces and institutional factors…. Wealth concentration [perhaps] negatively affects economic growth, shared prosperity, and democratic institutions….

Even if the income of top earners reflects genuinely worthwhile contributions to society and does not impede economic growth, today’s extreme inequality does threaten social cohesion. I used to contend that economists and policymakers need not worry about inequality and should instead focus on reducing poverty and expanding opportunity. But after years of researching the topic, I’ve come to believe that policymakers cannot achieve those goals without directly addressing inequality. In the winner-take-all economy of the contemporary United States, the gap between the top and the bottom has grown so large that it undermines any reasonable notion of equal opportunity. As inequality has increased, the country has witnessed a fraying of communities and institutions and deepening divisions along socioeconomic lines…

Should-Read: CPPC: Senator Amy Klobuchar: Drug Price Bills Will Likely Advance As Amendments to Larger Bills | CPPC | Home: “Senator Klobuchar began with… 1 out of 4 Americans have either cut their prescription drugs in half…

…skipped taking medications, or otherwise avoided the prescriptions they need because of drug costs. This crisis is systemic—Martin Shkreli is… just the tip of the iceberg. Privately, she told us, many Republican members of Congress are worried about drug prices and saying that something has to be done. She came prepared with a ready list of solutions… CREATES Act… [to] end regulatory abuses and promote access to generic drugs, an end to pay-for-delay (in which brand-name companies pay their generic rivals not to bring lower-cost alternative drugs to market), two bills that would allow Medicare Part D to negotiate lower drug prices, and a bill with Senator John McCain that would allow importation of cheaper drugs from other countries. Republican Senator Chuck Grassley of Iowa supports the CREATES Act and believes that it will pass; the challenge is to get the bill out of committee…. Klobuchar suggested that these bills will most likely advance as amendments to other, larger health care bills, and urged the attendees at the forum to keep advocating for reform…

Gary Cox: Should-Read: Political Institutions, Economic Liberty, and the Great Divergence: “Max Weber proposed that politically autonomous cities were ‘critical to Europe’s economic rise…

…because [they] allowed for the provision of secure property rights free from the ambitions of princely rulers (Stasavage 2014, p. 337).

Other institutionalists have argued that parliaments were key to Europe’s rise, because they too protected property rights against grasping monarchs (North and Weingast 1989; De Long and Shleifer 1993; Acemoglu et al. 2005). Skeptics have countered that both town councils and national parliaments were prone to capture by rent-extracting special interests, thereby impeding development (Epstein 2000; Volckart 2002; Stasavage 2014; Ogilvie and Carus 2014).

Another explanation holds that Europe’s persistent political fragmentation drove the continent’s divergence, by increasing merchants’ exit options and forcing rulers to compete (Baechler 1975; Landes 1999; Jones 2003; Vaubel 2008). Skeptics have countered that fragmentation also fostered over-taxation, free riding, and endemic warfare, all bad for development (Rosenthal 1992; Epstein 2000; Rosenthal and Wong 2011).

In this article, I argue that Europe’s political fragmentation interacted with her institutional innovations to foster substantial areas of “economic liberty,” where European merchants could organize production freer of central regulation, faced fewer central restrictions on their shipping and pricing decisions, and paid lower tariffs and tolls than their counterparts elsewhere in Eurasia. When fragmentation afforded merchants multiple politically independent routes on which to ship their goods, European rulers refrained from imposing onerous regulations and levying arbitrary tolls, lest they lose mercantile traffic to competing realms. Fragmented control of trade routes magnified the spillover effects of political reforms. If parliament curbed arbitrary regulations and tolls in one realm, then neighboring rulers might have to respond in kind, even if they themselves remained without a parliament.

Greater economic liberty, fostered by the interaction of fragmentation and reform, unleashed faster and more inter-connected urban growth. To document this, I examine patterns of urban growth over the period 600–1800 ce in five major Eurasian regions: Western Europe, Eastern Europe, the Islamic World, East Asia, and South Asia….”

Must-Read: Raymond Fisman, Keith Gladston, Ilyana Kuziemko, and Suresh Naidu: Do Americans want to tax capital? Evidence from online surveys: “We provide, to our knowledge, the first investigation of individuals’ preferences over jointly taxing income and wealth…

…via a survey on Amazon’s Mechanical Turk. We provide subjects with a set of hypothetical individuals’ incomes and wealth and elicit subjects’ preferred (absolute) tax bill for these individuals. Our method allows us to unobtrusively map both income earned and accumulated wealth into desired tax levels.

Our regression results yield roughly linear desired tax rates on income of about 14 percent. Respondents’ suggested tax rates indicate positive desired wealth taxation. When we distinguish between sources of wealth we found that, in line with recent theoretical arguments, subjects’ implied tax rate on wealth is three percent when the source of wealth is inheritance, far higher than the 0.8 percent rate when wealth is from savings. We show these tax rates are consistent with reasonable parameterizations of recent theoretical optimal wealth tax formulae.

Should-Read: Simon Wren-Lewis: The lesson monetary policy needs to learn: “The main problem with monetary policy…

…In 2009, when central banks would have liked to stimulate further but felt that interest rates were at their lower bound, they should have issued a statement that went something like this:

We have lost our main instrument for controlling the economy. There are other instruments we could use, but their impact is largely unknown, so they are completely unreliable. There is a much superior way of stimulating the economy in this situation, and that is fiscal policy, but of course it remains the government’s prerogative whether it wishes to use that instrument. Until we think the economy has recovered sufficiently to raise interest rates, the economy is no longer under our control.

I am not suggesting QE did not have a significant positive…. But its use allowed governments to imagine that ending the recession was not their responsibility, and that what I call the Consensus Assignment was still working. It was not: QE was one of the most unreliable policy instruments imaginable.

The criticism that this would involve the central bank exceeding its remit and telling politicians what to do is misplaced. Members of the ECB spent much of the time telling politicians the opposite, Mervyn King did the same in a more discreet way, while Ben Bernanke eventually said in essence something milder than the above….

A better criticism is that a statement of that kind would not have made any difference…. But this is about the future, and who knows what the political circumstances will be then. It is important that governments acknowledge that the Consensus Assignment no longer works if central banks believe there is a lower bound for interest rates, and this has to start by central banks admitting this. Economists like Paul Krugman, Brad DeLong and myself have been saying these things for so long and so often, but I think central banks still have problems fully accepting what this means for them.

Must-Read: The extremely thoughtful Martin Sandbu writes:

Martin Sandbu: Bolder rethinking needed on macroeconomic policy: “Top economists need to dig deeper after policy failures of past decade…

…Peterson Institute conference on “Rethinking Macroeconomic Policy”… I recommend everyone to take a look — but with a disappointment spoiler up front. For while some of the world’s most brilliant economists took part, which alone makes it worth a view, the promised “rethinking” was often more incremental (even marginal) than radical. The opening paper and presentation by Olivier Blanchard and Larry Summers is a tour de force in terms of stating where the debate stands today in a range of key policy areas. They were followed by former Federal Reserve chair Ben Bernanke, who headlined the panel on monetary policy….

Western economies are far from where central bankers thought they would have been by now, still either below capacity or not convincingly at full capacity. Worse yet, they do not understand why. In this context, one might have hoped for some deep soul-searching in a conference of this calibre. In terms of concrete “deliverables”, there were few new proposals for how to do monetary policy differently. The main contribution was Bernanke’s discussion of complementing the current framework of targeting inflation rates by targeting price levels. Targeting levels rather than rates of change has the advantage of built-in “memory”: in a situation where prices have fallen short of expectations….

Most profoundly, there was little sense of urgency that more radical rethinking was needed. Adam Posen, who convened the conference, was one of few who made a point out of this. He suggested that it was both ahistorical to think of asset purchases by central banks as unconventional (which implies that central bank action has been less innovative since the financial crisis than central bankers like to claim) and that more radical policy change was needed…. When Blanchard asked panellists whether, if conditions are “back to normal” 10 years from now, they thought central banks would think any differently about monetary policy, the shared expectation seemed to be that a normalisation of the economy would and should lead to a normalisation of policy thinking too, but with a preparedness for a possible return to abnormal situations. That view is oddly forgetful of recent history….

Expecting future monetary policy to be largely as before, with some newly exploited crisis tools in the toolbox, rather takes as given that monetary policy has performed close to the best it could have done both before and after the crisis. That is, if nothing else, a self-flattering view for monetary policymakers to take. But it is not very reassuring. For central bankers, as for everyone else, admitting one has got things badly wrong is a prerequisite for doing better.

Should-Read: Darrick Hamilton: Post-racial rhetoric, racial health disparities, and health disparity consequences of stigma, stress, and racism: “High achieving black Americans… still exhibit large health disparities…

…We discuss how the post-racial, politics of personal responsibility and “neoliberal paternalism” troupes discourage a public responsibility for the conditions of the poor and black Americans, and, instead, encourage punitive measures to “manage…surplus populations” of the poor and black Americans. We introduce an alternative frame and integrate it with John Henryism as a link to better understand the paradox above…

Should-Read: Larry Summers has had it with Kevin Hassett. Me? I am not surprised that Kevin has taken this road. But, then, I read Dow 36000 20 years ago. I am surprised that people are surprised:

Larry Summers: Hassett’s flawed analysis of the Trump tax plan: “Kevin Hassett… accuses me of an ad-hominem attack…

…I am proudly guilty of asserting that it is some combination of dishonest, incompetent and absurd. TV does not provide space to spell out the reasons why, so I am happy to provide them here.

I believe strongly in civility in public policy debates, and before the Trump administration do not believe I have ever used words like dishonest in disagreeing with the policy analyses of other economists. Part of my rationale for speaking so strongly here is that Mr Hassett called into question the integrity of the Tax Policy Center, a group staffed by highly respected former civil servants, by calling their work “scientifically indefensible” and “fiction”…. Hassett throws around the terms scientific and peer reviewed, yet there is no peer-reviewed support for his central claim that cutting the corporate tax rate from 35 per cent to 20 per cent would raise wages by $4,000 per worker….

Hassett’s “conservative” claim that the cut will raise wages by $4,000 in an economy with 150m workers is a claim that workers will benefit by $600bn or 300 per cent of the tax cut. To my knowledge, such a claim is unprecedented in analyses of tax incidence. Mr Hassett, though, doubles down by holding out the further possibility that wages might rise by $9,000….

Regressions of wage growth on tax rates cannot be understood as causal without a theory of the level of tax rates…. The observation that low tax rates coincide with significant growth in eastern Europe is of dubious relevance to the US…. If a PhD student submitted the CEA analysis as a term paper in public finance, I would be hard pressed to give it a passing grade. I predict that as debates on tax policy unfold there will be many serious Republican economists who endorse parts of the Trump plan. I doubt that any will associate themselves with the CEA analysis. If Mr Hassett wishes to preserve the CEA’s reputation and his own, next time he will not attack honest analysts and will himself be much more careful.