Should-Read: Lant Pritchett: The Perils of Partial Attribution: Let’s All Play for Team Development: “There was a growth acceleration in 1993 that created 1.1 trillion in additional GDP…

…Then, there was another growth acceleration in 2002 that created another 2.5 trillion in GDP (over and above the previous). Together, relative to the “business as usual” trajectory there has been 3.6 trillion dollars in gain (this cumulative additional GDP is larger than the annual total of the UK or France of about 2.8 trillion).

What caused this additional gain? Of course, no one is really sure exactly what it was and how to parse out the factors and simplistic (e.g. “trade reform”) explanations are almost certainly, well, simplistic. But something did happen and it almost certainly had to do with deft handling of the macro-economy plus a well-executed shift in strategy towards greater reliance on markets and more openness to the global economy (which is not saying that “laissez faire” was the answer or that India turned into a “neo-liberal” state).

Who caused this additional gain? In order to achieve a national policy shift there were of course hundreds, if not thousands of people who participated in producing evidence, disputing explanations of India’s past growth, examining alternatives for the future. But let me single out one group. The ICRIER (India Council on Research on International Economic Relations) was a think tank founded in 1981 that, according to its 20th anniversary document:

The Indian Council for Research on International Economic Relations (ICRIER) was established in August 1981 as an autonomous, policy-oriented, not-for-profit, research institution. This initiative was intended to foster improved understanding of policy choices for India in an era of growing international economic integration and interdependence….

There is a narrative in which Ford Foundation, a global philanthropy provides some millions of dollars of funding that play some role in creating a think tank that itself then plays some role in providing the conditions in which good policy choices are made that then results in the creation of 3.6 trillion in additional output of Indians. Suppose the Ford Foundation gave 36 million dollars (I have no idea what it really was but I strongly suspect this was the right order of magnitude and I just make it divisible) to support ICRIER….

In a very strange turn of events the organizations and supporters of the wildly successful “team development” are under pressure to sacrifice actions that can produce trillions in gains (in the economy, in education, in health, etc.) through systemic transformation. Instead development actors are being pressured to do only actions for which “rigorous evidence” proves “what works” but that leads inevitably to a focus on individualized actions known to produce at best mere millions—but for which the donors and external development actors can take direct causal credit. But there are real dangers from the perils of partial attribution in which individual actors care more about what they can take credit for than whether there is team success.

Should-Read: Matteo Maggiori, Brent Neiman, and Jesse Schreger: International Currencies and Capital Allocation: “The external wealth of countries has increased dramatically over the last forty years…

…Much is still unknown about trillions of dollars of capital allocated across the globe. Using a novel security-level dataset covering more than $27 trillion of global securities portfolios we find that the structure of global portfolios is driven, at both the macro and micro level, by an often neglected aspect: the currency of denomination of the assets. If a bond is denominated in the currency of one particular country, then investors based in that country tend to own the vast majority of that bond. This implies that the much-studied home bias in bonds is instead mostly currency bias.

Foreigners’ portfolios are very different from domestic portfolios: foreigners only finance a subset of domestic firms, those that issue bonds in the foreigners’ currency. The dollar and the euro are exceptions to this pattern, with companies in the US and EMU uniquely able to place local currency bonds in foreign portfolios. We uncover a large and pervasive shift in the use of these international currencies starting around the 2008 financial crisis. Cross-border portfolio holdings have starkly shifted away from euro-denominated bonds and toward dollar-denominated bonds…

Should-Read: Laura Tyson and Lenny Mendonca: Facing the Four Structural Threats to US Democracy: “As California has shown, structural barriers to good governance can be eliminated through citizen-driven reforms…

…The California legislature has cleaned up redistricting, introduced “top two primaries” and an aggressive disclosure system, reformed term limits, eliminated a supermajority rule for state budgetary measures, and improved the ballot-initiative process. As a result, the legislature has become dramatically more effective, and its approval rating has gone from just 14% seven years ago to 57% today–its highest level since 1988. There is little reason to believe that Congress will reform itself. But if the movement for progressive federalism continues to gain momentum and push through meaningful state- and local-level reforms, federal lawmakers will not be able to maintain the status quo indefinitely. With a renewed confidence in democracy, citizens can take action to ensure that elected officials are governed by the right incentives, and motivated to pursue bipartisan solutions to the country’s problems.

If California can do it, so can other states. America’s founders created the Tenth Amendment precisely because they worried about dysfunction in the capital. It’s time we used it.

Should-Read: Paul Krugman: Trump and Ryan Versus the Little People: “Consider four hypothetical taxpayers…. First is the poster child family Paul Ryan keeps talking about…

…a family with two children making $59,000 a year. In the first year of the Cut Cut Cut Act, such a family would indeed receive a tax cut… from… loss leaders to help sell the plan…. By 2027, with the plan fully phased in, that exemplary family would actually be facing a significant tax increase….

Second… someon… further up the scale… [who] still works for a living…. “Wall Street[‘s]” Gordon Gekko sneers at “a $400,000-a-year working Wall Street stiff flying first class and being comfortable.”… Once you take lost deductions into account, especially reduced deductions for state and local taxes, he almost certainly ends up facing a tax hike….

But what about owners of small businesses? Under current law, their business income is “passed through” to their personal income, and taxed accordingly. The Cut Cut Cut Act would instead allow people with such income to pay only 25 percent… [but] the G.O.P. bill imposes rules that… limit the 25 percent rate to “passive” income recipients…. You get the full tax break only if you own a business but don’t, you know, actually run it.

Finally… Eric Trump… inherit[s]… a business he doesn’t run…. He’ll get his inheritance tax-free…. He’ll get to pay a low tax rate on his business income. And his stocks will pay higher dividends, because the G.O.P. bill also sharply cuts corporate tax rates….

So when Gary Cohn… says that the bill’s goal is “to deliver middle-class tax cuts to the hard-working families in this country,” he’s claiming that up is down and black is white…. You might wonder how Republicans imagine that they can get away with this…. Anyone who has paid attention to U.S. politics knows…. First, they will lie…. Second, they will try to distract working-class voters by stoking racial animosity…

Must-Read: Claudia Goldin: How to Win the Battle of the Sexes Over Pay (Hint: It Isn’t Simple): “Billie Jean King… the United States Open… 1972… $10,000. Ilie Năstase, her male counterpart, won $25,000…

…Ms. King fought hard for equal rights and, on the tennis court, she won. By 1973, men and women received the same prizes at the Open…. That is not the reality in the overall labor market, however…. Fighting to eradicate discriminatory employment practices is absolutely needed, of course…. Unequal treatment in hiring and in the work setting is real…. Yet… the time demands of many jobs can explain much of the pay difference, a finding that has sobering implications. Eliminating the gender earnings gap will require changes in millions of households and thousands of individual workplaces….

The gap is a statistic that changes during the life of a worker. Typically, it’s small when formal education ends and employment begins, and it increases with age. More to the point, it increases when women marry and when they begin bearing children. Using the data that shows women earn 81 cents for each dollar earned by men, when the careers of recent college graduates start, the gap is much smaller: 92 cents for each male dollar. By the time college-educated women are 40 years old, they earn 73 cents…. Correcting for time off and hours of work reduces the difference in the earnings between men and women but doesn’t eliminate it….

Women disproportionately seek jobs—including full-time jobs—that are more likely to mesh with family responsibilities, which, for the most part, are still greater for women than for men. So, the research shows, women tend to prefer jobs that offer flexibility: the ability to shift hours of work and rearrange shifts to accommodate emergencies at home. Such jobs tend to be more predictable, with fewer on-call hours and less exposure to weekend and evening obligations. These advantages have a negative consequence: lower earnings per hour, even when the number of hours worked is the same….

Certain job characteristics have a big impact on the gender earnings gap… Subject to strict deadlines and time pressure… Expected to be in direct contact with other workers or clients… Instructed to develop cooperative working relationships… Assigned to work on highly specific projects… Unable to independently determine their tasks and goals Occupations with a lower level of these characteristics (like jobs in science and technology) show smaller gaps…. Men’s earnings tend to surge when there are fewer substitutes for a given worker, when the job must be done in teams and when clients demand specific lawyers, accountants, consultants and financial advisers. Such differences can account for about half the gender earnings gap. These findings provide more nuance in explaining why the gap widens with age and why it is greater for women with children…

Must-Read: Barry Eichengreen: Trade Policy and Growth: “Nothing one can say in this area is uncontroversial…

…Prior to 1913… O’Rourke (2000)… estimated unconditional convergence equations, conditional convergence equations, and factor-accumulation models for a panel of ten countries and eight periods between 1874 and 1914, and concluded from all three approaches that tariffs were positively associated with growth. The result is robust to including country fixed effects… controlling for initial income… including changes in capital/labor and land/labor ratios; it is not all about a correlation between tariffs and the presence of a frontier….

The problem is that none of the standard explanations for this positive tariff-growth correlation hold water. Generalizing from their reading of U.S. history, Collins and Williamson (2001) argue that… tariffs… lowered the relative price of capital and through this channel boosted investment and growth. This… is consistent with… Abramovitz and David (1973)… resonates with… DeLong and Summers (1991)…. Another possible explanation is the infant-industry argument, specifically the version which assumes that learning by doing is concentrated in the industrial sector…. Unfortunately, this interpretation does not withstand scrutiny. To start with, the relative price of investment goods depended on other things besides just tariffs… like resource endowments and the direction of technical change…. A detailed analysis of the U.S. tariff code by DeLong (the same DeLong of DeLong and Summers fame) does not support the idea that the tariff favored imported investment goods over consumer goods. To the contrary, DeLong verifies the existence of tariffs on imports of capital goods as high as 50 per cent, and concludes that “the tariff made a wide range of investment goods – from British machine tools and steam engines to steel rails to precision instruments – more expensive” (DeLong 1998, p.369)….

Certainly, the historical literature is consistent with the idea that temporary protection can have long-lived, even permanent, effects in shifting comparative advantage. Juhasz (2014) shows that French cities that enjoyed temporary protection from British textile exports during the Napoleonic Wars were quick to enter the cotton spinning industry and remained internationally competitive long after trade with Britain was restored.Other examples of this natural-experiment-type evidence could be cited. But none of these studies really documents the existence of localized learning–of intra-firm knowledge spillovers from production. Where scholars, for example Doug Irwin (1998) in the case of tinplate production, looked for them, they found that knowledge spillovers are as much international as domestic….

Borrowing constraints, recall, are a standard argument for protecting infant industries on second-best grounds (Dasgupta and Stiglitz 1988). But this emphasis on capital market constraints sits uneasily with the extent of international borrowing and lending in this earlier period…. Schularick and Steger (2010) analyze the relationship between the growth of real GDP per capita and financial integration in the decades before 1913, controlling for initial income, other policies and endogeneity, and measuring financial integration in a variety of different ways. Financial integration, they find, was positively, significantly and robustly associated with economic growth….

By process of elimination, we are left with the simplest hypothesis: that tariffs, which in this earlier period typically protected manufacturing more generously than agriculture, were associated with higher incomes and faster growth because the productivity of labor, and perhaps also the productivity of other factors of production, was significantly higher in manufacturing than agriculture. The 19th century was a period of unprecedented technological progress, in industry in particular. (It wasn’t called the Industrial Revolution for nothing.) As a result, disequilibrium wage and productivity gaps between workers in agriculture and industry were substantial in the period’s late-developing countries….

The obvious challenge… is that productivity gaps between agriculture and industry are even larger in developing countries today…. The explanation, I submit, is that the reasons for the productivity gap were different. In the 19th century, its source was a succession of positive shocks to manufacturing productivity, in conjunction with information and migration costs that prevented labor from being reallocated at a rate sufficient to close the gap. Nowadays, every farmer in Western China knows how much higher wages are in manufacturing enterprises on the coast, and only the internal passport (hukou) system prevents more of them from moving in response. Channels for disseminating this information, while not absent in the 19th century, were less well developed….

This, in conjunction with positive shocks to technology in manufacturing, kept labor productivity in the two sectors in a state of persistent disequilibrium. Hence tariffs protecting manufacturing, with the intent of making the sector larger, offset domestic distortions making the sector too small…. In the absence of… first-best interventions, which were resisted on grounds of ideology, self-interest and because in some cases government lacked the relevant capacity, tariffs were second best….

The problem in poor countries today is different. It is the existence of domestic distortions that depress agricultural productivity and at the same time make it hard for manufacturing to expand, tariff protection or not…. The inability of manufacturing to expand productively may reflect the absence of labor with the requisite skills, inadequate infrastructure, or an unstable and unpredictable policy environment. Again, these are distortions to which tariff protection is irrelevant. This resolution is consistent with… the tariff-growth correlation… positive then, but negative or zero today… [and] a caution to… advocates of protection for manufacturing in high-income countries…

Must-Read: David Kamin: Fixing the Loophole in the House Limit on Deductibility of State and Local Income Taxes: “First, under the legislation…

…is there a loophole in the proposed limit on deductibility of state and local income taxes allowing investors and pass-through business owners (partners in law firms or private equity firms or Donald Trump himself) to take an itemized deduction for the state and local income taxes they pay on their profits, even as employees cannot? Our assessment: Based on the current legislative text and the descriptions of the legislation so far offered by Ways and Means staff and some JCT written materials, we believe the answer to this is “yes”—the best reading is that there is such a loophole.

Second, do the current revenue and distributional estimates from JCT take this “pass-through” loophole into account? Our assessment: Based on what we have seen so far and comparing the JCT revenue estimate to others, we believe the answer is likely “no” and that JCT, contrary to what the bill seems to do, has assumed that no state and local income taxes are deductible as an itemized deduction—whether paid by a business owner, investor, or employee.

Third, do the revenue and distributional estimates take into account how states and localities could restructure their income taxes to preserve deductibility for trade and business owners (but not employees), even if the itemized deduction really is barred? We explain later in this post exactly how this restructuring would work to essentially preserve deductibility of state and local income taxes for pass-through business owners. Our assessment: Again, our best guess is that the answer is “no” and that the JCT estimates are much too optimistic for this reason alone…