Must-Read: Paul Krugman: Tax Cuts and The Trade Deficit

Posted on by Brad DeLong

Must-Read: As one would expect, Paul Krugman is right here: If the Tax Foundation’s model is a good projection of the effects of the Trumpublican tax cut for the rich, it would indeed reduce manufacturing employment by around 2.5 million”. Now it is highly unlikely that it would do that—a tenth of that number would be more on the mark. IMHO, take the Tax Foundation’s claims about the bill and divide the benefits by 10—and recognize that the Tax Foundation does not assess the costs of the bill at all:

Paul Krugman: Tax Cuts and The Trade Deficit: “TF provides very little detail on their model, which is itself a flashing red light: transparency is essential…

…But… read in a ways, there’s a table….

Tax Cuts And The Trade Deficit

In… a decade… the U.S capital stock will be 9.9% bigger than it would otherwise have been. Where do the savings for that increase in capital come from? Since there’s nothing in the bill that would increase domestic savings—on the contrary, the budget deficit would reduce national savings—they come from inflows of foreign capital… extra… trade deficits… more than $600 billion a year. Somehow, TF isn’t advertising that point…. Mainly it would come from manufacturing…. The U.S. manufacturing sector would be around 20% smaller than it would have been otherwise…. Huge capital inflows would drive up the dollar, making U.S. manufacturing much less competitive…. Starting with 12.5 million current manufacturing workers, this means around 2.5 million fewer manufacturing jobs.

So let me say this clearly: if you believe the Tax Foundation analysis, you should also believe that the Senate bill would reduce manufacturing employment by around 2 1/2 million. Yes, jobs would be added in other sectors. But it’s not exactly what Trump has been promising, is it? So why isn’t Tax Foundation talking about any of this? Actually, it’s pretty clear that they haven’t thought through the implications of their own model…

Weekend reading: “Medicaid expansion, unpredictable schedules, and monopoly power” edition

Posted on by Bridget Ansel

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. 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.

Equitable Growth round-up

We write about new research that the financial benefits of Medicaid expansion under the Affordable Care Act are double that of previous estimates once you account for the effects that Medicaid has on household credit.

With the Schedules That Work Act garnering renewed attention this week, Liz Hipple looks at what the research says about unpredictable scheduling.

On Tuesday, Jacob Robbins, a Ph.D. candidate in economics at Brown University and a Junior Fellow at Equitable Growth, presented his research on the macroeconomic implications of the rise in monopoly power in the United States over the past 40 years. You can stream Jacob’s seminar here.

Links from around the web

Over the past 40 years, the United States has fallen farther behind its peers in terms of the revenue those nations raise in taxes as a share of gross domestic product. Eduardo Porter steps back from the specifics of our current tax debate in order to examine just why the United States continues to push for a “uniquely stingy tax policy.” [nytimes]

Danielle Paquette writes about a new U.S. Bureau of Labor Statistics report on how the fastest growing jobs are also some of the lowest paying—and dominated by women. Over the next ten years, the BLS predicts 1.2 million more home health and personal care aides—more than the projected job creation in the eight other fastest growing fields combined. [wonkblog]

Pedro Nicolaci da Costa looks at the way that early- and mid- 20th century housing policy explicitly based on segregation is at the root of the racial wealth gaps that exist today. [business insider]

The 18 states that declined to expand their Medicaid programs under the Affordble Care Act are not just passing up billions of dollars to treat poor residents. Margot Sanger-Katz and Kevin Quealy write that these states are essentially subsidizing the others that opted into the Medicaid provision. [the upshot]

What can the Eastern Band of Cherokee Indians tell us about the policy idea of implementing a universal basic income? Through in-depth interviews and a look at the extensive research done on the tribe, whose members have been receiving individual casino revenue payouts since the 1990s, Issie Lapowsky details how the cash payments have had profound positive effects.  [wired]

Friday figure

From “The ‘United Framework’ is a proposal for two new wasteful tax expenditures” by Greg Leiserson.

Should-Read: Martin Wolf: A bruising Brexit could shipwreck the British economy

Posted on by Brad DeLong

Should-Read: Martin Wolf: A bruising Brexit could shipwreck the British economy: “The UK economy remains the most regionally divided in Europe…

…Inner London is the richest region in Europe. The other regions (apart from the rest of London and the southeast) are far poorer…. Gross domestic product per head has also only regained pre-crisis levels in London and the southeast…. Various categories of insecure work have greatly increased. In 2016, for example, 2.8 per cent of all people in employment were on zero-hours contracts…. It must be hard for people working under such contracts to have much control over their lives.

The UK’s level of inequality is among the highest in Europe…. People might wonder, given UK performance, what these business leaders have done to justify such huge increases. They might also point to the facts that the UK’s average productivity per hours worked is among the lowest among high-income countries and, still worse, productivity has flatlined since the crisis…. Last, but not least, on this list of failings, UK investment is exceptionally weak…. Spending on research and development is also relatively weak…. This is not a vigorous and healthy economy well able to take the shock of substantially worse access to its most important markets…. Economic disappointment must have been among the reasons for the Brexit vote. Yet the Brexit shock, combined with the UK’s underlying weaknesses, is likely to make the disappointment for many still more severe. The UK has embarked on a risky voyage in a leaky boat. Beware a shipwreck.

Should-Read: Matthew Yglesias: Watch CEOs admit they won’t actually invest more if tax reform passes

Posted on by Brad DeLong

Should-Read: Matthew Yglesias: Watch CEOs admit they won’t actually invest more if tax reform passes: “A telling and important moment…

…Awkward…. John Bussey… asks the CEOs in the room, “If the tax reform bill goes through, do you plan to increase investment—your companies’ investment—capital investment,” and requests a show of hands. Only a few hands go up, leaving Cohn to ask sheepishly, “Why aren’t the other hands up?” The reason few hands are raised is there’s little reason to believe that the kind of broad corporate income tax cut Republicans are pushing for will induce much new investment. A tax plan that was specifically designed to reduce taxation of new investments might do that. But most corporate profits are, of course, the result of activities undertaken in the past. So a broad cut in corporate tax rates is a windfall for what in tax policy jargon is called “old capital,” as well as for monopoly and quasi-monopoly rents and various other things that have nothing to do with incentivizing new investment.

The biggest immediate winners, in fact, would be big, established companies that are already highly profitable. Apple, for example, would get a huge tax cut even though the company’s gargantuan cash balance is all the proof in the world that the its investments are limited by Tim Cook’s beliefs about what Apple can usefully take on, not by a limited supply of cash or a lack of profitability…

Chye-Ching Huang: @dashching on Twitter: Problems with Tax Foundation model

Posted on by Brad DeLong

Must-Read: @dashching seems like an unhappy camper today—unhappy with the Tax Foundation setting forth a model that (a) they know is inaccurate even on their own methodologies, and (b) based on a methodology—that the medium-run drag on growth from a larger deficit does not exist—that I do not believe can be defended in a professional manner:

Chye-Ching Huang: @dashching on Twitter: “A Tax Foundation dynamic score that no-one should pay any attention to an indication of what this bill would do for growth…

…Two major problems:

  1. Unlike mainstream models, the Tax Foundation’s ignores deficits. Would be very strange for lawmakers concerned about deficits to rely on a model that ignores them https://t.co/CUBxnAop6e.
  2. Further, @gregleiserson has identified two major additional conceptual errors with the model https://t.co/IHv2iIYeoP, that don’t seem fully resolved. These are not errors modeling specific proposals, but affect the model’s results, every time it runs…

Should-Read: Douglas L. Campbell: Ancestry and Development: the Power Pose of Economics?

Posted on by Brad DeLong

Should-Read: Douglas L. Campbell: Ancestry and Development: the Power Pose of Economics?: “George Mason… asked me to present my work joint with Ju Hyun Pyun, taking down the “genetic distance to the US predicts development”…

…This has evolved into an Amy Cuddy “Power Pose” situation, in which Spolaore and Wacziarg refuse to admit that there is any problem with their research, and continue to run income-level regressions and write papers using genetic distance which do not include a dummy for sub-Saharan Africa, but exclude that region instead…. The remaining question is how robust the genetic distance-development relationship is in Europe. In fact, there is already a paper, by Giuliano, Spilimbergo, and Tonon, saying that the impact of genetic distance on both trade and GDP in Europe is not robust…. The early drafts of that paper also said something about GDP in Europe, while the published version stripped out GDP precisely because the referees—likely Spolaore or Wacziarg—wouldn’t allow it….

Wacziarg has now posted regressions on his website used by this referee, so I gather that he must be the author… had some very choice words for this paper… “Giuliano, Spilimbergo and Tonon, the authors of this paper are clearly referring to an old (2006) version, which contained numerous errors and imprecisions.”… I’m curious… what kind of “errors and imprecisions”?… I decided to check if Giuliano, Spilimbergo, and Tonon were really that careless, or whether Spolaore and Wacziarg were, once again, wrong… on the metro ride from Dupont Circle to George Mason, I fired up Stata to check how robust the results were when we exclude sub-Saharan Africa….

It’s amazing to me that these two Harvard PhDs would want to continue to push this, and to stake their reputations on this…. They now have written an additional 5-6 papers, it seems, repeating the same mistakes, even after they became aware that their results are not robust…. In their new paper, they’ve gone back to the cross-country income regressions, which they previously conceded were not robust. I guess they were hoping that their comments over at Gelman’s blog (and at Marginal Revolution) would be forgotten. In any case, if Spolaore and Wacziarg want to respond with more gibberish, I’ll yield to them the floor…

Must-Read: Noah Smith: On Twitter @noahpinion: “Nasty tweets are like nasty blog comments…

Posted on by Brad DeLong

Must-Read: Noah Smith gets this 100% right, IMHO

Noah Smith: On Twitter @noahpinion: “Nasty tweets are like nasty blog comments…

…My feed is like a blog. And because Twitter has no way to delete or moderate individual tweets, blocking is the only option for curation….

Blocking isn’t for my own benefit. It’s to protect my timeline and my followers from people who just come to disrupt conversation and create unnecessary bad feelings!… [People muted] still respond to my tweets and engage with my followers, this disrupting the friendly, positive community I want to create in my timeline…

Six Faces of Right-Wing Chain-Forging Economist James Buchanan…

Posted on by Brad DeLong

Steven Teles inquired why I liked Will Wilkinson’s essay How Libertarian Democracy Skepticism Infected the American Right much more than I liked Henry Farrell and Steven Teles’s essays When Politics Drives Scholarship and Even the intellectual left is drawn to conspiracy theories about the right. Resist them as takes on Nancy McLean’s Democracy in Chains http://amzn.to/2zKJygv…

I must confess that I was struck by the contrast between the, on the one hand, enormously generous hermeneutic through which [Steve Teles and Henry Farrell] read James Buchanan and the, on the other hand, ungenerous hermeneutic through which [they] read Nancy McLean….

I see at least six James Buchanans:

  1. The brilliant academic thinker behind the genius insights of Calculus of Consent http://amzn.to/2hF4H5k. It is worth noting that the framework underlying CoC with its emphasis on unanimity at the constitutional stage for any regime that can be just or justified, has a profoundly egalitarian and even Rawlsian bent—a bent that becomes stronger the thinner you make the veil of ignorance and the more averse to risk you make the people behind it. Thus the fact that Buchanan deduces a profoundly anti-egalitarian politics and built from it an intellectual movement that, as Mancur Olson used to say, “has a very strong right but a very weak left wing, and will never be healthy until both are equally strong” from it, is deserving of much careful and thoughtful inquiry.
  2. The academic operator seeking to get money from ex-Governor and U.Va. President Darden for the great public choice research project by overpromising how useful his Thomas Jefferson Center for Political Economy would be in providing intellectual weapons to strengthen the political causes of Darden and his friends.
  3. The academic operator going beyond what I, at least, regard as the permissible academic pale by imposing a political-ideological litmus test on who he invited into the public choice circle—i.e., not Mancur Olson, or any Olson students or potential Olson students (like me, in my younger days). That only “‘Manchester’ liberals who emphasize individual freedom as the central feature of the good society” and “Western conservatives who
    emphasize the importance of Western traditions in preserving the good social order” are invited in is, IMHO at least, in shocking contrast to say, Marty Feldstein’s NBER, where the bet is that an honest intellectual process will show that I am right—and if it shows otherwise, I badly need to know that.
  4. The grandson of Kentucky Governor John Buchanan, offended that Yankees would dare tell southern gentlemen how to deal with their “peculiar institutions”. (And just what are these “Western traditions”? And how near to the core of these “Western traditions” is white supremacy anyway? That the language here is Aesopian is not to Buchanan’s credit.)
  5. The friend of plutocrats or would-be plutocrats buying into the Hayekian idea that political democracy was, fundamentally, a mistake because the plebes would vote themselves bread-and-circuses and so ultimately destroy civilization.
  6. The right-wing activist seeking, in a von Misian or Rothbardian way, to harness and in fact mobilize racial evil to the service of what he regarded as the good of stomping the New Deal and Keynesian economics into oblivion.

I tend to see Buchanan(1) as at least half the picture. (I was, after all, one of the two people at the fall 1986 MIT Economics Department Wednesday faculty lunch after the Nobel Prize announcement willing to say that awarding the prize to James Buchanan was not an obvious and stupid mistake—the other one, IIRC, being Jim Poterba). Our elders had very strong opinions..

Nancy sees Buchanan(6) as 1/3 of the picture, Buchanan(5) as 1/3 of the picture, Buchanan(4) as 1/6 of the picture, Buchanan(3) as 1/6 of the picture, and does not see Buchanan(2) or Buchanan(1) at all.

But, of course, they cannot be separated. They are all in there together.

And I think Will Wilkinson: How Libertarian Democracy Skepticism Infected the American Right overwhelmingly gets closest to the proper balance of anything I have read so far…

Cf., also:

Should-Read: Noah Smith: The “cackling cartoon villain” defense of DSGE

Posted on by Brad DeLong

Should-Read: Noah Smith: The “cackling cartoon villain” defense of DSGE: “The new defense of DSGE by Christiano, Eichenbaum, and Trabandt is pretty cringe-inducing…

…reads like a line from a cackling cartoon villain. “Buahahaha, you pitiful fools” kind of stuff. It’s so silly that I almost suspect Christiano et al. of staging a false-flag operation to get more people to hate DSGE modelers…. Calling DSGE critics “dilettantes” was a bad move. By far the best recent critique of DSGE (in my opinion) was written by Anton Korinek of Johns Hopkins. Korinek is a DSGE macroeconomist. He makes DSGE models for a living. But according to Christiano et al., the fact that he thinks his own field has problems makes him a “dilettante.”…

Dismissive snorting is… a bad look. Why? Because declaring that outsiders are never qualified to criticize your field makes you look insular and arrogant. Every economist knows about regulatory capture. It’s not much of a leap to think that researchers can be captured too — that if the only people who are allowed to criticize X are people who make a living doing X, then all the potential critics will have a vested interest in preserving the status quo…. Christiano et al.’s essay looks like a demand for outsiders to shut up and keep mailing the checks.

Second of all, Christiano et al. give ammo to the “econ isn’t a science” crowd by using the word “experiments” to refer to model simulations…. Everyone knows that model simulations aren’t experiments, so obstinately insisting on misusing this word just makes econ look like a pseudoscience to outside observers…

Shiller CAPE Is Currently Pricing in One Great Recession Every Decade

Posted on by Brad DeLong

Note to Self: Spent the Berkeley Econ faculty lunch talking to Yuriy Gorodnichenko, Pierre-Olivier Gourinchas, St. Matthew the Greater, Dmitriy Sergeyev, and a couple of others about a very wide range of topics, ending with r-star (which Yuriy has to discuss Saturday at the Clausen Center Conference). I left the conversation desperate to figure out how Shiller’s stock-market CAPE index which currently suggests substantial stock market valuation even with a low fundamental safe real interest rate r-star is affected by the low earnings of the crisis years 2008-2011…

Yes, it makes a significant difference:

2017 11 15 Shiller Alternative CAPE

Replacing actual earnings from 2007 on with just flat real earnings until actual earnings catch up knocks the Alternative CAPE index down by 5, from higher than any time save during the High Dot-Com Bubble to lower than during the 1995-2007 part of the Great Moderation era. Taking Shiller CAPE at face value means that your idea of stock market fundamentals is currently pricing in one Great Recession every decade. If you do not believe that, you should not take Shiller CAPE at face value…

2017 11 15 Long Run Shiller Alternative CAPE

Data: http://delong.typepad.com/2017-11-15_shiller_cape_alternative.csv
Notebook: https://www.dropbox.com/s/9vhwu0d26wobpg8/2017-11-15%20Shiller%20Alternative%20CAPE.ipynb

# set up function to import data as a pandas time series dataframe object 

import pandas as pd
import os
from urllib.request import urlretrieve

URL = "http://delong.typepad.com/2017-11-15_shiller_cape_alternative.csv"
FILENAME = "2017-11-15_shiller_cape_alternative.csv"

def get_stocks_data(filename, url, force_download = False):
    if force_download or not os.path.exists(filename):
        urlretrieve(url, filename)
    data = pd.read_csv(filename, index_col = 0)
    return data

# import shiller data as a pandas time series dataframe object
# read it in from web if necessary

stocks_data = get_stocks_data(URL, FILENAME)
stocks_data.rename(columns = {'CAPE’':'Alternative CAPE'}, inplace = True)

stocks_data['Alternative CAPE'].plot()
stocks_data['CAPE'].plot()

plt.title("Stock Market Value as a Multiple of a 10-Year

Lagged Moving Average of Earnings”,
size=20)
plt.ylabel(“Multiple of 10-Yr Average of Lagged Earnings”)
plt.xlabel(“Year”)
plt.xlim(1970, )
plt.legend()

stocks_data['Alternative CAPE'].plot()
stocks_data['CAPE'].plot()
plt.title("Stock Market Value as a Multiple of a 10-Year

Lagged Moving Average of Earnings”,
size=20)
plt.ylabel(“Multiple of 10-Yr Average of Lagged Earnings”)
plt.xlabel(“Year”)
plt.legend()