Must- and Should-Reads: February 28, 2017


Interesting Reads:

Must-Read: Heather Boushey: The Fix: How Nations Survive and Thrive in a World in Decline

Must-Read: Heather Boushey: The Fix: How Nations Survive and Thrive in a World in Decline: “Peter Temin’s… The Vanishing Middle Class…. argues that the distribution of gains from economic growth today…

…make the United States look like a developing economy… the dual sector model developed in the 1950s by W. Arthur Lewis… how development and lack of development progress side by side. One sector… is the home of modern production, where development is limited only by the amount of capital. The other sector… suppl[ies] a vast surplus of labor…. Temin… argues that “the vanishing middle class has left behind a dual economy.” His dual sectors are finance, technology, and electronics… and low-skill work, akin to the subsistence sector, whose workers bear the brunt of the vagaries of globalization….

These developments play out along racial lines set by the nation’s history of slavery. The bridge between these two sides of the economy is education…. Temin’s top policy recommendation is universal access to high-quality preschool and greater financial support for public universities. His second recommendation is to reverse policies that repress poor folk of any race…. Alas, neither of these recommendations is potent enough to overcome the fundamental problems Temin identifies…

Must-Read: Nick Crafts: Whither Economic Growth?

Nick Crafts Whither Economic Growth Dimming Horizon http www imf org external pubs ft fandd 2017 03 crafts htm

Must-Read: Nick Crafts: Whither Economic Growth?: “Only yesterday… the so-called new economy was ascendant…

…Today there is a widespread fear of a future of secular stagnation, in which very slow growth will be the new normal—especially in advanced economies…. Current mainstream growth projections for the United States and the European Union over the medium term represent a marked slowdown from growth rates in the decades prior to the global financial crisis that began in 2008… a serious weakening of growth in labor productivity… is expected…. Today’s pessimism… is based on the recent history of growth performance….

In the recent past, information and communication technology made a stellar contribution to productivity growth in a relatively short time span…. It is possible that a forward-looking approach could give a more optimistic view…. First, in a world where artificial intelligence is progressing rapidly and robots will be able to replace humans in many tasks—including in low-wage service sector jobs that once seemed out of the reach of technological advances—another surge of labor productivity growth may be possible…. Second, the rise of China could boost world research and development intensity considerably…. Third, the information and communication technology revolution—by reducing the cost of accessing knowledge and greatly enhancing the scope for data analysis, which is the cornerstone of scientific advancement—paves the way for discovery of useful new technology….

For Western Europe the narrative is about catch-up… rather than… cutting-edge technological progress… [in] three distinct phases. The first, which ended in the early 1970s, saw rapid catch-up growth…. The second… from the early 1970s to the mid-1990s… catch-up in terms of real GDP per person ground to a halt… a decline in work hours and employment despite strong growth in labor productivity…. Third… from the mid-1990s to the crisis… Europe steadily fell behind. The upshot is that in 2007 the income level of the original 15 members of the European Union (the so-called EU15—Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom) was slightly lower relative to that of the United States than it had been in 1973….

Sluggish Future: Over at Finance and Development

Over at Finance and Development: Sluggish Future: You are reading this because of the long, steady decline in nominal and real interest rates on all kinds of safe investments, such as US Treasury securities. The decline has created a world in which, as economist Alvin Hansen put it when he saw a similar situation in 1938, we see “sick recoveries… die in their infancy and depressions… feed on themselves and leave a hard and seemingly immovable core of unemployment…” In other words, a world of secular stagnation. Harvard Professor Kenneth Rogoff thinks this is a passing phase—that nobody will talk about secular stagnation in nine years. Perhaps. But the balance of probabilities is the other way. Financial markets do not expect this problem to go away for at least a generation… Read MOAR at Finance and Development

Should-Read: Kevin Drum: WSJ: Republicans Give Up, Admit They Can’t Create a Non-Appalling Health Care Plan

Should-Read: Kevin Drum: WSJ: Republicans Give Up, Admit They Can’t Create a Non-Appalling Health Care Plan: “There you have it…

…It has “become obvious” they can’t craft a decent replacement plan now, so instead they’re going to try to convince everyone that they can craft a replacement plan later. This is obvious nonsense, but they’re just going to bull ahead and dare anyone to stop them…. The desperation Republicans are showing here is remarkable. They are all but admitting that they flatly can’t pass a health care plan that’s worth the paper it’s printed on. This is not an auspicious start to their plan to show the country how great things can be if they’d just put the GOP in charge once and for all.

Seven important U.S. economic trends to consider before President Trump’s first address to Congress

Members of the House of Representatives gather in the chamber last month (AP Photo/J. Scott Applewhite).

Tonight, President Trump will address a joint session of the U.S. House of Representatives and U.S. Senate. The speech will very likely focus on the economy, so Equitable Growth has compiled seven useful graphs that show important trends in the U.S. economy. The graphs show the state of the ongoing recovery from the Great Recession of 2007-2009 as well as some remaining structural challenges facing the economy. Underlying all of these graphs is the need for an accurate read of economy developments in order to inform sound policymaking. This cannot be done without accurate, unbiased data.

Perhaps the starkest trend in the United States in recent decades is increasing income inequality. The latest published data gives policymakers the best look yet at levels of income inequality, and confirms the high levels other studies have shown. (See Figure 1.)

Figure 1

One consequence of higher levels of income inequality in the United States is that it’s harder for children to earn more than their parents did at the same age. Absolute income mobility appears to have been declining since the 1980s. (See Figure 2.)

Figure 2

Some measures of underemployment—such as the U6 rate that includes the number of workers either discouraged from looking for a job or working part time but eager for full-time work—continue to show that slack remains in the U.S. labor market. But the overall underemployment trend since the Great Recession has been similar to the headline unemployment rate: downward. (See Figure 3.)

Figure 3

Another measure of the health of the U.S. labor market—the number of unemployed workers per job opening—has returned to pre-recession levels. The lower this number goes, the more employers need to actively recruit workers to get them to take jobs. (See Figure 4.)

Figure 4

The share of prime-age workers with a job remains below its pre-Great Recession peak in December 2007. But note that the employment rate was below its 2001 peak before the onset of that deep recession, suggesting a possible structural reason for this decline. The lack of strong wage growth indicates there are structural problems related to a lack of demand. (See Figure 5.)

Figure 5

Another structural trend in the U.S. labor market is the declining labor force participation rate for women. Declining participation for men and possible reasons for this decline—among them technological change, trade, or macroeconomic policy choices—have garnered quite a bit of attention, but the United States is now falling behind other high-income countries when it comes to female participation in the labor market. The likely reason is the lack of policy support for women who choose to work. (See Figure 6.)

Figure 6

Meanwhile, U.S. corporate profits have become an increasingly larger part of the US economy. The source of this increase in corporate profits is not entirely clear yet, but the research points toward increasing business concentration possibly due to a lack of antitrust enforcement, increased outsourcing, or technological change. (See Figure 7.)

Figure 7

Conclusion

The policies outlined by President Trump and debated in Congress will have implications for the economy as a whole, and for individuals in all communities across the United States. The trends detailed in this factsheet are important markers for policymakers committed to an economy that works for all.

Additional resources

The fading American dream: trends in absolute income mobility since 1940,” Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, and Jimmy Narang.

Economic growth in the United States: A tale of two countries,” Thomas Piketty, Emmanuel Saez, and Gabriel Zucman.

Can women’s ‘sagging middle’ help explain the fall in U.S. labor force participation rates?,” Elisabeth Jacobs.

U.S. tax revenue will rise modestly in the next 10 years, not thanks to corporate taxes,” Kavya Vaghul.

Declining business dynamism and illusive allocative efficiency

Productivity isn’t just a function of innovation. New ideas and technology have the capacity to greatly boost the productive capacity of an economy, but those forces are for naught if new ways of doing things are not spread throughout the economy or if resources don’t flow to more productive companies. The benefits of such “allocative efficiency” is one reason why some researchers and policymakers are concerned about a less dynamic U.S. economy. If fewer companies are being started and workers are less likely to switch jobs, then productivity might take a hit. New research suggests that this is happening.

The paper is from Ryan Decker of the Board of Governors of the Federal Reserve System, John Halitwanger of the University of Maryland, and Ron Jarmin and Javier Miranda, both of the U.S. Census Bureau. The four economists use firm-level data on productivity to decompose (breakout into constituent parts) several trends in U.S. labor productivity growth. The decomposition roughly divides productivity growth into three buckets. The “within-firm” bucket captures productivity growth for existing firms. The second bucket indicates the change in productivity growth due to reallocation between existing firms. And the third bucket shows how much of productivity growth is due to the gains from firms entering the economy.

What the four economists find that is that productivity growth among existing firms isn’t the primary driver of the drop-off in overall productivity growth that we’ve seen since the turn of the century. The biggest decline among the three factors is in the second one, indicating a decline in reallocation between existing firms. In other words, employment and economic output are not flowing to the more productive firms. The third bucket also contributed to the post-2000 decline in productivity growth, as the net entry of new businesses also was on the decline, indicative of the potential impact of the declining start-up rate in the United States. The authors do note that the first factor—within-firm productivity—may also be contributing to some extent as productivity growth among high-productivity firms has declined.

As the authors note, many explanations of declining productivity growth popular among policymakers, the media, and some economists focus on slowing technological advancement or the mismeasurement of new technologies. This new decomposition points instead at declines in business dynamism as a possibly more fruitful avenue for getting a grip on why U.S. productivity growth has been slowing. The research by these four economists provides far from a definitive answer, yet the paper suggests a refocusing on research and conversation in this area that might be, well, very productive.

House Speaker Ryan’s tax reform plan is not ready for prime time

The federal tax reform blueprint developed by Speaker of the House Paul Ryan (R-WI) and his colleagues in the majority in the House of Representatives combines lower tax rates for individuals with a “destination-based cash flow” business tax applicable to all businesses. The cash flow element means that businesses will be allowed to write off capital expenses such as machines and that routine investment returns will be exempt from taxation. The destination basis means that exports will be tax exempt and imports taxable.

The Ryan tax reform plan has several major problems. Specifically, it:

  • Is incompatible with our trade law obligations
  • Is incompatible with our tax treaties
  • Would generates large federal revenue losses
  • Would make our tax system less progressive at the proposed tax rates
  • Will not solve the problems of businesses shifting their incomes to overseas tax havens even though this is what it is designed to address

Our working paper details these problems. Here, we summarize our findings and recommend an alternative approach to tax reform that is both progressive and revenue neutral.


New Working Paper
Problems with destination-based corporate taxes and the Ryan blueprint


The “border adjustment” feature of the Ryan blueprint raises key problems. Indeed, the incompatibility of the Ryan blueprint with trade rules is no mere technicality. U.S. trading partners are likely to be hurt by increased incentives to operate in the United States and by much larger profit shifting by their businesses. Trading partners are likely to retaliate, which risks large negative effects to the world trading system as well as an uncertain investment climate. There is no easy way to solve the tax reform plan’s incompatibility with U.S. obligations under the World Trade Organization. If the U.S. government in the end were to comply with WTO rules by turning this plan into a “normal” value added tax, or VAT, then it would turn the corporate tax into a regressive consumption tax. And the border adjustment feature could not be dropped without huge revenue losses as well as enormous tax avoidance problems.

In addition, the Ryan blueprint generates vexing technical tax problems that are not easily fixed. There are important issues surrounding how U.S. exporters with losses would be handled (which could lead to inefficient tax-induced mergers), how financial transactions would be handled, how U.S. state corporate tax systems would be affected, and how the transition to the new tax system would be handled. There are also multi-trillion dollar wealth effects, with a large reduction in wealth for U.S. holders of foreign assets.

Profit shifting is not completely eliminated by the plan, contrary to claims. As an example, the Ryan plan makes it easier for U.S. corporations to move profits offshore on intellectual property, especially when the intellectual property serves foreign markets. (See Figure 1.)

Figure 1

The tax reform plan is likely to generate large revenue losses, too, estimated at $3 trillion over ten years by the Tax Policy Center. These revenue losses may be understated since they assume there will not be tax avoidance due to the large discrepancy between the proposed top personal rate of 33 percent and the business rate of 20 percent (or 25 percent for those filing pass-through business income). New tax avoidance opportunities will arise as wealthy individuals seek to earn their income in tax-preferred ways that reduce their labor compensation in favor of business income that would be taxed at a lower rate.

Further, while the border tax provisions generate more federal tax revenue over the short run, the revenue from the border adjustment is contingent on the United States maintaining its current trade deficit. Since trade deficits eventually have to be paid back in the form of trade surpluses, these revenue gains are really being borrowed from future U.S. taxpayers.

Finally, due to the tax rates that have been proposed, the Ryan tax reform plan creates a less progressive tax system. Tax Policy Center estimates show that the top 1 percent of individual income earners receive a tax cut of $213,000, while the tax cut for the bottom 80 percent averages $210. The regressive nature of these tax changes is unjustifiable given the increases in economic inequality over the previous decades. Capital income and rents (undue business profits due to market concentration), are far more concentrated than labor income. And the lower business tax rates chosen by the plan are intellectually incoherent because the plan exempts taxes on the normal return to capital and reduces profit shifting—both of which are the usual arguments for a lower rate in the first place. If such concerns are moot, then there is no reason to tax business income at a lower rate than labor income.

Given these concerns, we would recommend that Congress reject the Ryan blueprint. Instead, it should focus on revenue neutral tax reform that reduces the corporate tax rate and eliminates the major corporate welfare provisions, including taxing accumulated offshore earnings in full. Doing so would eliminate the incentive to earn income in tax havens, by treating foreign and domestic income alike for tax purposes. Pairing that reform with a lower corporate tax rate need not raise tax burdens on average. A more fundamental reform would require treating multinational enterprises as a single business entity, which would better align the tax system with the reality of globally integrated corporations.

—Reuven Avi-Yonah is the Irwin I. Cohn professor of law at the University of Michigan Law School, and Kimberly Clausing is the Thormond A. Miller and Walter Mintz professor of economics at Reed College

For further details on the authors’ tax reform proposals please see an accompanying fact sheet and the following background materials:

Download File
"Problems with destination-based corporate taxes and the Ryan blueprint" (Fact Sheet)

View the fact sheet in your browser

Local economic decline affects marriage and fertility rates, but in a surprising way

Photo of a gear from an air compressor that provided plant air for the former Ormet plant lies on the ground at the site in Hannibal, Ohio. Manufacturing’s decline has impacted local marriage and fertility rates, but in different ways depending on whether the affected industry is male- or female-intensive.

Scholars have long thought about how our jobs shape our identities both in an out of the workplace. But a new paper shows the extent to which one’s job—or lack thereof—also impacts the roles we assume within our family life. The research, by Massachusetts Institute of Technology’s David Autor, University of Zurich’s David Dorn, and University of California-San Diego’s Gordon Hanson looks at what happens to families in the United States when work disappears, specifically in areas with a high concentration of manufacturing that are hard-hit by trade.

Men and women have both paid the cost economically speaking, but they have reacted differently to their changing fortunes. Whether an affected industry is male-intensive versus female-intensive has a profound effect on local marriage and fertility trends. Traditional marriage patterns are more common in areas where men’s economic status remains superior to women’s, but less so where men’s jobs have taken the largest hit.

Manufacturing has historically been a “good job” in the sense that it was steady and well-paying for someone without a college degree. Men have always been more likely to hold these jobs, partially due to the perception that “it’s still dirty and dark and dangerous.” Women who do work in manufacturing tend to be concentrated in certain industries, such as textiles, apparels, and leather. In the 1990s, the share of female manufacturing workers peaked at 32 percent and has since fallen, as women-dominant sectors were hit especially hard during the Great Recession.

The gender gap in manufacturing matters because manufacturing jobs tend to pay more—17 percent on average—than non-manufacturing jobs, which contributes to a gender gap in pay. In fact, the male-female gap in annual earnings is much larger in areas in which a large share of adults (men and women) working in manufacturing. In these areas men take home, on average, a much bigger paycheck than their female counterparts.

But over the past few decades, manufacturing has been on the decline due to increased competition and trade, leaving many men—and women—out of a job or earning less. But with all the anxiety that’s accompanied this shift, it’s easy to overlook another key trend—growth in the service sector has added more jobs than were lost in manufacturing. These jobs tend to be low-paying, however, which is one reason many men are reluctant to take them, along with the perception that they are too feminine.  Whatever the reason, one thing is clear: Manufacturing’s decline has diminished many men’s economic status in comparison to women, especially men in the bottom quarter of the income spectrum.

The story of what happens next is familiar. Families struggling to make ends meet. Men dropping out of the labor force all together. An explosion of drug and alcohol use, and, for some, premature death, alongside the rise of incarceration during the same time period. The authors of the paper found that all these phenomena were more prevalent among men in areas where manufacturing declined.

It’s no surprise, then, that entire families would be affected, especially considering that these demographic and social shifts resulted in fewer men overall in these hard-hit regions of the country. Areas that were economically affected most by trade saw a reduction in the number of young adults who are married. These regions also experienced a declining birth rate and a higher rate of babies born to single mothers (and because of that, more child poverty). The authors find that these trends are pervasive across all racial and ethnic groups.

It could be that women are unwilling to legally bind themselves to men who are facing financial, legal, or health problems—or that there are fewer men to marry. Autor and his coauthors believe that these are all valid reasons for the decline in marriage, but also point to research by Marianne Bertrand and Emir Kamenica of University of Chicago, and Jessica Pan of the National University of Singapore. In their paper, they find that marriage becomes less likely between men and women if a women’s income is likely to exceed that of her future husband. The three scholars find that “standard economic models […] cannot account for this pattern. Instead, we argue that gender identity norms play an important role in marriage.”

This hypothesis is further born out by looking at regions that only saw a decline in female-intensive industries, which are fewer in number but have faced enormous upheaval, especially during the Great Recession. Not only did marriages in these areas not decline, but instead marriage rates went up while reducing the number of children who live in single-headed households.

Of course, the overall declines in marriage and single-headed households aren’t driven exclusively by the decline in manufacturing. But this research does speak to how much workers’ identities are tied up with presumed work roles in life, whether that’s one’s job, economic status, or gender. What is clear is that these norms are increasingly costly in the face of a changing economy. The inability of policymakers to help workers adapt is creating a crisis that has a ripple effects for the entire U.S. economy, political system, and prosperity of future generations.

Should-Reads: February 26, 2017


Interesting Reads: