Should-Read: James Pethokoukis: Why can’t the GOP come up with any serious ideas?

Posted on by Brad DeLong

Should-Read: James Pethokoukis: Why can’t the GOP come up with any serious ideas?: “This is proving to be a monumental week in the 163-year history of the Republican Party. And so far, it isn’t going very well… http://www.aei.org/publication/why-cant-the-gop-come-up-with-any-serious-ideas/

…Republicans should be uncomfortable with any tax plan that reduces federal revenue. The national debt as a share of the economy has tripled over the past decade to a historically high level. Meanwhile, the country faces a tidal wave of increased spending on retirees. So whatever the benefits of some individual pieces of this tax plan, it is fiscally and intellectually incoherent in its totality. It also makes a joke of the GOP’s supposed deficit worries during the Obama years.

Both the GOP’s health care and tax efforts show, if not an intellectually fatigued party, then one unwilling to speak truth to its voters: Tax cuts almost never pay for themselves. Universal health insurance coverage is a proper societal goal. ObamaCare isn’t to blame for slow economic growth. The future U.S. tax burden is far more likely to rise than fall. Trying to maintain policy fictions — whether to appease Fox News, talk radio, or voters with misplaced expectations — gets you a week like this one, a week full of bad politics and bad policy. And with little sign that GOPers are ready to acknowledge these hard truths, this bad week is unlikely to be the last one.

Should-Read: Victor Chernozhukov et al.: Announcement of new Economics (econ) archive

Posted on by Brad DeLong

Should-Read: This is coming 20 years after I expected it. And it is, at the moment, confined to econometrics. But very nice to see:

Victor Chernozhukov et al.: Announcement of new Economics (econ) archive: “An Economics section of the scientific repository arXiv is opening this month… https://arxiv.org/help/econ/announcement

…arXiv is internationally acknowledged as a pioneering open access preprint repository. It has transformed the scholarly communication infrastructure of multiple fields of physics and plays an increasingly prominent role in mathematics, computer science, quantitative biology, quantitative finance, and statistics. arXiv is an essential component of scientific communication for many researchers worldwide in order to rapidly and widely disseminate their findings, establish priority of their discoveries, and seek feedback to help improve their work. It is hosted by the Cornell University Library with additional funding from 220 members libraries and several scientific foundations including the Simons Foundation.

The Economics arXiv will start with a single subject area of Econometrics, but according to demand we expect to add more subject areas in the future, and the Econometrics subject can also be subdivided further. The reason to start with Econometrics is that a significant number of Econometricians already regularly submit their work to the statistics domain of the arXiv. We hope that creating an explicit Econometrics domain will result in a majority of Econometricians to submit their work to the arXiv, so that most of the new papers in the field are disseminated in that way. If that goal is achieved, then regularly checking the Econometrics arXiv will become an efficient and easy way to stay current on the Econometrics literature. We initially want to focus on methodological papers, in agreement with the following description:

econ.EM (econometrics): Econometric Theory, Micro-Econometrics, Macro-Econometrics, Empirical Content of Economic Relations discovered via New Methods, Methodological Aspects of the Application of Statistical Inference to Economic Data
The arXiv allows to upload a new version of a paper anytime, while also maintaining all previous versions. This helps clarify academic priority of ideas, while at the same time always making the latest version of papers available.

Manuscripts can be submitted in different formats. Latex files are preferred, but pdf files printed from a word processor other than TeX or LaTeX are also possible. Before submitting an article one needs to create a user account and in some cases an endorsement from an existing user may be necessary, but this should be unproblematic.

To ensure the success of this project, we encourage you all to submit your current Econometrics working papers to the Econometrics arXiv. The first postings on the new arXiv section will appear on September 26, 2017. The inaugural moderator of econ.EM will be Victor Chernozhukov (MIT).

Should-Read: Jong-Wha Lee: South Korea’s Looming Crisis

Posted on by Brad DeLong

Should-Read: According to the IMF, South Korea is 30th in the world in GDP per capita—above New Zealand, Italy, Spain, and Israel. Shouldn’t the focus be on some of the things Korea does right, as well as “73rd… for labor-market efficiency… 58th for institutional quality… productivity in the services sector amounts to just 45% that of the manufacturing sector… compared with an OECD average of 90%”? In fact, why not say “productivity in manufacturing amounts to a massive 220% of that of the services sector, compared with an OECD average of 110%”? And do note that the U.S.’s vaunted “labor market efficiency” has plausibly been a net minus from any comprehensive societal well-being perspective over the past two decades…

Jong-Wha Lee: South Korea’s Looming Crisis: “More problematic, however, are South Korea’s low labor-market efficiency and weak institutions… https://www.project-syndicate.org/commentary/south-korea-nuclear-threat-economic-crisis-by-lee-jong-wha-2017-10

…According to the World Economic Forum’s latest global competitiveness report, South Korea ranks 73rd worldwide for labor-market efficiency, as a result of tight restrictions on employee-employer relations. And it ranks 58th for institutional quality, owing to excessive government regulations, opaque corporate governance, and policy instability. Finally, productivity in the services sector amounts to just 45% that of the manufacturing sector, on average, compared with an OECD average of 90%. The problem is most acute in finance, real estate, business services, and community and government services…

Must-Read: Tyler Cowen: The Fed Needs a Savvy Politician as Its Chair

Posted on by Brad DeLong

Must-Read: It is very hard to read the subtext of what Tyler Cowen is saying here about the Fed Chair.

If I had to guess, it would be that he is saying:

  1. The first key requirement of a Fed Chair is that he or she not have already angered Trump. Gary Cohn has angered Trump. So he is out.
  2. There are a bunch of remaining candidates on the Republican side: Taylor, Warsh, Powell, and Kashkari.
  3. The second key requirement for a Fed Chair is that he or she be a calm, sane, consensus builder.
  4. John Taylor has, over the past decade, alienated his academic colleagues to a remarkable degree in his pursuit of Republican street-red. That disqualifies him.
  5. Kevin Warsh was, while at the Fed, a strident and wrong anti-Bernanke voice. That disqualifies him.
  6. Powell and Kashkari have taken reasonable positions and made strong and reasonable arguments for them—and would be good Fed chairs.
  7. But when you “compare… [their] leadership virtues to Yellen[‘s]…” she comes out ahead.

That, at least, is what I think he is trying to say:

Tyler Cowen: The Fed Needs a Savvy Politician as Its Chair: “The next time major economic volatility comes around, Fed decisions will be scrutinized and politicized like never before… https://www.bloomberg.com/view/articles/2017-10-05/the-fed-needs-a-savvy-politician-as-its-chair

…[by] the mainstream media… social media… perhaps by our very own president…. The key factor for any Fed leader will be the ability to maintain and project a coherent, unified voice at the Fed, so that the Fed remains an island of relative sanity in the polarized nation….

National Economic Council Director Gary Cohn was a former front-runner, and may still be in the running, but his recent public squabbles with Trump disqualify him by the above standards. Candidates on the Republican side include former Fed board governor Kevin Warsh, current governor Jay Powell, Stanford University economist John Taylor and current Minneapolis Fed president Neel Kashkari, all with notable talents. I would prefer the one who, in the interviewing process, comes off as the most low-key, most able to build consensus, best with the news media, and perhaps has done the least to publicly lobby for the post.

Then compare that candidate’s leadership virtues to Yellen.

This time around, it’s all about the politics.

Should-Attend: Alice Wu: Labor Lunch: Gender Stereotyping Academia: Evidence from Economics Job Market Rumors Forum

Posted on by Brad DeLong

Should-Attend: Alice Wu: Labor Lunch: Gender Stereotyping Academia: Evidence from Economics Job Market Rumors Forum: “Thursday, October 05, 2017 | 12-1 p.m. | 648 Evans Hall… http://events.berkeley.edu/index.php/calendar/sn/econ.html?event_ID=111181 https://www.dropbox.com/s/k4i8900wgwn0gcr/Wu_EJMR_paper_09_2017.pdf?dl=0

…I first design a propensity score model to infer the gender a post mainly refers to from text, and simultaneously identify the individual words with the strongest association with gender. The words selected provide a direct look into the gender stereotyped language on this forum. Through a topic analysis of the posts, I find that when women are under discussion, the discourse tends to become significantly less academic or professionally oriented, and more about personal information and physical appearance. Moreover, a panel data analysis reveals the state dependence between the content of posts within a thread. In particular, once women are mentioned in a thread, the topic is likely to shift from academic to personal…

Why is the federal business-level tax rate on capital so low?

Posted on by Emilie Openchowski
Speaker of the House Paul Ryan, R-WI, and Senate Majority Leader Mitch McConnell, R-KY, meet with reporters to announce the Republicans’ proposed rewrite of the tax code for individuals and corporations.

The “Unified Framework for Fixing Our Broken Tax Code” recently released by the Trump administration and congressional Republicans proposes sharp reductions in the corporate tax rate (from 35 percent to 20 percent) and in the tax rate applicable to pass-through income (from 39.6 percent to 25 percent). Proponents of large reductions in the federal statutory tax rates on business income often assert that these cuts will generate large increases in private-sector investment and economic growth. A key premise underlying these arguments is that federal business taxes—the corporate income tax paid by traditional C corporations and the individual income tax paid by owners of pass-through businesses—impose a substantial burden on new investments by businesses.

Yet due to the combination of accelerated depreciation of tangible investments, expensing of intangible investments, largely unrestricted deductibility of interest payments, and the research and development tax credit, federal business taxes impose only a low rate of tax on new investment today. In a recent issue brief, “What is the federal business-level tax on capital in the United States?,” I presented estimates of the effective tax rate on capital income attributable to business-level taxes. The effective marginal tax rate on capital income (the risk-free return attributable to new investment) is 8 percent under current law and would rise only to 13 percent if a temporary provision known as bonus depreciation expires.

Why do new investments face such a low rate of tax attributable to business-level taxes? In short, the answer is that deductions and credits serve to exempt most of the capital income attributable to new investments from taxes. Accelerated depreciation allows businesses to write off the cost of an investment faster than the equipment, structures, inventories, or intangibles in which they invest lose value, effectively understating income. Interest deductions allow firms to subtract interest payments from income, effectively exempting the return on debt-financed investments from business-level taxes. And the research and development tax credit offers a direct reduction in tax for investments in many types of intangibles.

When a firm invests in a tangible asset—for example, when it buys a bulldozer—it is entitled to deduct a portion of the cost of the bulldozer each year to reflect depreciation, or the decline in the value of the bulldozer over time. Depreciation at a rate that corresponds to the true decline in value of the asset over time is referred to as economic depreciation, and depreciation at a faster pace is referred to as accelerated depreciation. Because a dollar today is worth more than a dollar tomorrow, when depreciation deductions are accelerated, it serves to reduce the total tax burden and reduce the tax rate. (See Figure 1.)

Figure 1

On average, depreciation deductions allowed by federal tax law are accelerated relative to economic depreciation. In addition, bonus depreciation—a temporary provision scheduled to expire in 2020—further accelerates depreciation deductions for certain investments. For many types of intangible assets, firms can deduct the full cost of creating them in the year in which the expense is incurred. This extreme case of accelerated depreciation is known as expensing.

In addition to deductions for accelerated depreciation, if a business finances an investment using debt, it can also deduct the interest payments from income. This serves to exempt the income on the debt-financed portion of the investment from business-level taxes. Suppose, for example, a business borrows half the money it needs to buy a bulldozer. Then it will have a stream of interest deductions that offset a portion of the net income generated by the bulldozer equal to the interest payments on that loan. Regardless of whether the interest income is taxed when it is received by the lender, the deduction will serve to ensure that much of the income resulting from this investment does not appear in the business tax base.

Federal tax law also provides a credit for research and development expenses. Similar to other tax credits, the research credit directly reduces the tax rate on the activity for which the credit is granted—in this case, investing in certain intangibles by conducting research.

The table below presents estimates of the business-level effective marginal tax rate on capital under current law. The first three columns provide estimates assuming bonus depreciation is in effect and the second three columns provide estimates assuming bonus depreciation has expired. The average business-level effective marginal tax rate is 8 percent under current law today and 13 percent without bonus depreciation, as would be the case for current law in 2020. These rates reflect the average of a strongly negative tax rate for fully debt-financed investment (negative-54 percent) and a positive tax rate for fully equity-financed investment (21 percent). (See Table 1.)

Table 1

A better approach to business tax reform

In light of these findings, the case for reductions in the statutory business tax rate as a means of spurring additional capital investment is weak. A reduction in the business tax rate would come at a very high cost, as it would apply to the entire business tax base, including excess returns and labor income, as well as to returns on investments made in the past. (See this previous column for an extended version of this argument.) The impact on capital investment would be highly attenuated, as debt-financed investments face a negative rate at the business level, and thus a rate cut would increase the tax rate on such investments by reducing the value of the deductions they generate. Moreover, as the channel through which a reduced effective marginal tax rate can increase investment is lowering the cost of capital, deficit-financed tax cuts that increase the cost of capital can be actively counterproductive.

A better approach to reform would focus on reducing the disparities in tax rates across types of produced capital and across financing arrangements. This variation is largely driven by variation in the extent to which tax depreciation is accelerated relative to economic depreciation and variation in the use of debt finance. Well-designed reform should thus pursue a revenue-neutral or revenue-increasing reallocation of the current tax benefits for debt to equity that reduces the disparities in the tax rates on investments in different types of produced capital. Such a reallocation could also lower the tax rate on produced capital and increase the tax rate on land. These reforms would offer a more plausible path to economic growth than reductions in the statutory tax rates on business income.

Old companies may be slowing down the U.S. economy

Posted on by Emilie Openchowski
People attend Vivatech, a gadgets conference in Paris, France.

Though Stevie Nicks didn’t sing about them, firms are getting older too. The age of companies is rising in the United States, just as the rate at which Americans are starting firms is declining. Fewer startups and older firms—a trend that began in 1980—could have a number of negative consequences, an important one being slower productivity growth. But how much is the aging of companies actually affecting productivity? A new paper released this week by the National Bureau of Economic Research takes a look.

The paper—by economists Titan Alon and David Berger of Northwestern University, Robert Dent of Nomura Securities, and Benjamin Pugsley of the University of Notre Dame—takes two approaches to figuring out how much the increasing age of firms may be affecting the pace of productivity growth. The first is to use data from the U.S. Census Bureau to create data on labor productivity of firms over their lifecycles. These data on the lifecycles tell us how much productivity growth differs for firms across the age spectrum. The profiles show that young firms have significantly higher productivity growth and that this growth falls off very quickly. During the first year of business, brand new firms’ productivity grows by 15 percent on average. But that growth falls very quickly over the next few years and by the fifth year, the average productivity growth is essentially zero.

What accounts for this downward trend in productivity growth? The authors decompose the lifecycle profile, attributing different portions of the trends to specific factors. The largest factor behind the large productivity growth of young firms is reallocation of resources toward more productive firms, accounting for about two-thirds of productivity growth. The other one-third is due to selection, or the fact that less-productive companies are failing more than the more productive companies.

The economists then calculate the level of productivity growth we might have seen in 2014 if the startup rate had stayed at its 1980 level and if the distribution of companies hadn’t aged over the next 34 years. According to this exercise, labor productivity would have been 3.1 percent higher in 2014 or, put differently, labor productivity would have been 0.1 percent higher each year over that period. Assuming that labor productivity increases are fully passed through to household income, median household income would have been about $1,600 higher under this situation.

The four economists also run several regression analyses on the relationship between increased startups and productivity growth across states and metropolitan statistical areas. While they want to understand how startup rates affect productivity, productivity likely has an impact on startup rates as well. People will probably start more businesses if an area has strong and growing productivity. To get around this potential problem, the authors “instrument” for new business creation by using demographic changes in the state or metropolitan statistical areas and—in the second analysis—the amount of house-price increases during the 2002–2006 bubble that were due to speculation. The logic is that areas with more population growth will see more people start businesses due to increased demand, and places that saw increased access to collateral for loans from house-price increases also will have more startups—neither factor is likely to be influenced by productivity growth. The results here are broadly consistent with the earlier findings: Fewer startups and older firms lead to slower productivity growth.

The authors don’t look at the reasons why there is less startup activity now, but increasingly researchers are looking at the role of increased market power. Productivity growth by itself won’t lead to strong increases in living standards, but living standards are unlikely to rise without it. Understanding what’s led to fewer new firms in the U.S. economy—whether it be corporate consolidation or other factors—may be more important than many economists and economic policymakers currently realize.

Should-Read: Paul Krugman: Shifts Get Real: Understanding the GOP’s Policy Quagmire

Posted on by Brad DeLong

Should-Read: Why are the Republicans—Ryan, McConnell, and Trump, all—proposing a tax cut for the upper class substantially funded by a tax increase on the largely-Republican upper middle class anyway?

Paul Krugman: Shifts Get Real: Understanding the GOP’s Policy Quagmire: “There are crucial links between the health care faceplant and the bad news (for the GOP) on taxes — links both causal and… cultural… https://krugman.blogs.nytimes.com/2017/09/30/shifts-get-real-understanding-the-gops-policy-quagmire/?_r=0

…Republicans took power in January determined to cut taxes on the wealthy, bigly. That has, after all, been the GOP establishment’s overriding priority for four decades; it’s what donors demand. But they’re somewhat constrained by concerns about deficits. It’s not that they themselves care about red ink: nobody with influence in the GOP has ever cared about federal debt, least of all the deficit peacocks who preened and posed as apostles of fiscal responsibility. But all that posturing makes budget-busting tax cuts awkward. And procedural issues in the Senate also make it hard to do too much budget-busting without 60 seats….

Republicans have always claimed that they can cut tax rates without losing revenue by closing loopholes. But they’ve always avoided saying anything about which loopholes they’d close…. But… the shifts need to get real. So where will the money come from? The bright answer in Trumpcuts is, end the deduction for state and local taxes (SALT)… punish blue states…. But there are a lot of Republican voters in blue states…. And who are these voters?… Affluent but not super-rich… for whom deductibility of SALT is a big deal. As the details of the plan sink in, these people will scream bloody murder, and their representatives will become a big problem for the leadership.

So what were they thinking? My guess is that they weren’t…. We learned from health care was that after 8 years, Republicans had never bothered to learn anything about the issues. There’s every reason to believe that the same is true for the distribution of tax changes, which Paul Ryan called a “ridiculous” issue and presumably nobody in his party ever tried to understand. So now the lies and willful ignorance are catching up with them — again.

Fact sheet: Occupational segregation in the United States

Posted on by David Evans

Occupational segregation occurs when one demographic group is overrepresented or underrepresented among different kinds of work or different types of jobs. In 2015, for example, men were 53 percent of the U.S. labor force1, but held less than 30 percent of the jobs in education and more than 98 percent of the jobs in construction.2

Download File
Occupational segregation in the United States

Read the full PDF in your browser

The evidence shows that occupational segregation based on gender occurs more because of assumptions about what kinds of work different genders are best suited for than because of an efficient allocation of innate talent. To the extent to which that is true, occupational segregation hurts economic growth because:

  • It depresses productivity and growth by limiting the economically optimal matching of workers’ skills with jobs.
  • It depresses the labor force participation rate because workers are less apt to adapt to changes in the economy by taking jobs in growing sectors due to perceptions about which occupations correspond to which gender identifications.
  • It depresses aggregate demand in the economy by substantially depressing female wages, contributing to the gender wage gap, and therefore reducing families’ incomes.

Key takeaways

    • Occupations with more men tend to be paid better regardless of skill or education level.3 This is because if work is done predominantly by women, then it is valued less in the labor market. As the rate of women working in a given occupation increases, the pay in that occupation declines—even when controlling for education and skills.4
    • This trend is also highly racialized: Women of color at all education levels are segregated into jobs with lower wages than their white female peers of similar skill levels.5
    • Occupational integration since 1960 was responsible for 60 percent of real wage growth (after accounting for inflation) for black women, 40 percent for white women, and 45 percent for black men.6
    • Half of the gender wage gap since 1980 can be attributed to women working in different occupations and industries than men, making it the single largest factor. Discrimination accounts for another 38 percent.7
  • While the prevalence of women in low-paid occupations is due to negative biases about the market value of “women’s work,” the prevalence of men in highly paid occupations is often due to workplace cultures that demand long hours and facetime in the office, which does not accommodate flexibility for caregiving.9 (See Figure 1.)

Figure 1

  • Many of the occupations that will add the most jobs by 2024, including health care support, administrative assistance, early childhood care and education, and food preparation and services, are composed of more than 60 percent women.10
  • The shift in the economy from occupations that have traditionally been male-dominated—namely manufacturing—to ones that are female-dominated and low-paid has implications for the structure and strength of U.S. families. As men’s economic position declines relative to women’s, the prevalence of marriage declines and the fraction of children born to poor single-parent households increases.11

To learn more on this subject from the Washington Center for Equitable Growth

Gender segregation at work: ‘separate but equal’ or ‘inefficient and unfair’
Will McGrew, August 2016

Do U.S. women choose low-paid occupations, or do low-paid occupations choose them?
Bridget Ansel, April 2017

Local economic decline affects marriage and fertility rates, but in a surprising way
Bridget Ansel, February 2017

Many of the fastest growing jobs in the United States are missing men
Bridget Ansel, December 2016

More U.S. men are becoming nurses but not entering other traditionally female occupations

Posted on by Emilie Openchowski
A patient and a registered nurse in a hospital in Chicago. The number of male registered nurses in the United States has increased substantially over the past 40 years.

As U.S. manufacturing jobs have waned, and the service and health care sectors have flourished over the past few decades, a growing number of men are leaving behind traditional factory or industry jobs for a new title: nurse. A new Equitable Growth working paper by University of Louisville’s Elizabeth Munnich and University of Notre Dame’s Abigail Wozniak documents the substantial increase in the share of male registered nurses over the past 40 years, going from 2.2 percent in 1960 to 13 percent in 2015. (See Figure 1.)

Figure 1

Nursing is one of the most gender-segregated professions both in the United States and internationally. Many men entered nursing well into the 19th century, but the profession became the exclusive domain of women during the Industrial Revolution, thanks to a combination of cultural mores and legal barriers that kept men out. But over the past 40 years, things began to shift: Nursing schools were required to admit men, nonhospital based programs made it easier to obtain degrees later in one’s career, and the work became more physical in nature, possibly making it more attractive to men.

A registered nursing certification can be obtained through a two-year postsecondary school certification, meaning that it is a career that does not require a bachelor’s degree, although many nurses do have them. In fact, Munnich and Wozniak find that both men and women are more likely to become an RN as they age through their late 30s, implying that many enter nursing after pursing other professions initially.

The authors find that a shift in gender norms also played a substantial role in the rise of male RNs. Munnich and Wozniak discuss the way that organizations such as the American Assembly of Men in Nursing were established in the 1970s, and how some philanthropic foundations began to target their efforts toward recruiting and retaining male nurses. Campaigns aimed specifically at men began to crop up, with tag lines such as “Are you man enough to be a nurse?”

This research should be viewed in the context of the decline of many middle-skilled jobs over the past 40 years, which have hit male-dominated industries such as manufacturing particularly hard. Earnings for men with a high school degree declined over the same period in which relative earnings for RNs increased as part of a growth in relative earnings for skilled workers more generally. But notably, since 1990, median earning levels for RNs have been on par with college-equivalent workers. (See Figure 2.)

Figure 2

The two authors suggest that this has made nursing “considerably more attractive relative to jobs not requiring a college degree.” Munnich and Wozniak do not, however, look at how much of the increase in wages for RNs was driven solely by the growing share of men entering the profession. Other research documents that occupations with more men tend to be paid regardless of skill or education level. In fact, gender differences in occupations and industries account for more than half of the gender wage gap.

The authors’ findings are notable, given that they do not represent a larger trend of men entering traditionally female jobs. Munnich and Wozniak say that there was no similar uptick in the share of men in female-dominant professions such as primary and secondary teachers, bank tellers, and physicians’ assistants. Even though female-dominant occupations are some of the fastest growing in the United States, many men have been reluctant to take these jobs, with some men preferring to drop out of the labor force altogether—over the past few decades, men’s labor force participation has dropped precipitously.

What’s more, the authors also find that men are less likely to take nursing jobs during economic downturns, preferring to retreat to more traditional occupations. More work needs to be done to understand why.

Munnich and Wozniak’s research documenting the rising share of men in nursing is an important case study of how to move more men into a high-growth middle-skilled occupation. The authors suggest access to community college and degree certification programs will go a long way to bolstering the trend. But further research into what makes nursing unique—and why other female-dominant industries have not seen an equivalent influx of men—is crucial to address declining male labor force participation and help men adapt to the changing economy.

For more information on occupational segregation, check out our fact sheet here.