Morning Must-Read: Paul de Grauwe: Quantitative Easing and the Euro Zone: The Sad Consequences of the Fear of QE

Posted on by Brad DeLong

From my perspective, QE has always seemed to me to be likely to be:

  1. Very effective if it changes expectations of the future price level–that shakes rates rates of return significantly, and gives real people powerful incentives to spend their cash now.
  2. But setting up QE in such a way that it changes expectations of the future price level is difficult: the problem is that QE transactions are easily undone in the future, and there is every reason to think that an inflation-targeting central bank will undo them in the future.
  3. And if QE does not change expectations of the future price level its effects on real rates of return are minimal.

Think of it: for the ECB to buy €1 trillion of ten-year EU government bonds which have a term premium of 0.1%-point per year of duration means that the ECB takes duration risk off of private-sector balance sheets that the private market currently charges €10 billion/year to bear. It frees-up that risk-bearing capacity to be deployed elsewhere. In a €20 trillion/year Eurozone economy that is 0.05%. You can blather about financial accelerators and credit multipliers all you want, but it is a very uphill task to convince me that that is a big deal.

So why do it?

  1. It is a small plus.
  2. It might become part of a process that moves expectations and turns into a big plus.
  3. There is nothing else politically practical on the agenda that might be done that QE takes attention away from.

The very sharp Paul de Grauwe:

Paul de Grauwe: Quantitative Easing and the Euro Zone: The Sad Consequences of the Fear of QE: “I see two reasons why the case for [Eurozone] QE is overwhelming…

…First, QE is merely a correction for… the last two years… [when] the ECB withdrew about €1 trillion out of the euro-zone economy…. Second, the euro-zone economy is not getting off the ground…. Since Milton Friedman we have all become monetarists. In order to raise inflation it will be necessary to increase the growth rate of the money stock. This requires that the ECB increase the money base. And to achieve the latter there is only one practical instrument, ie, an open-market purchase of government bonds…. But… QE… is necessary but not sufficient. The fact that it is not sufficient, however, should not lead to the conclusion that it can be dispensed with….

There is much misunderstanding and fear regarding QE, especially in Germany. There is the fear that… German taxpayers risk having to foot the bill…. [But] if… say the Italian government were to default… [it] would stop paying interest but at the same time (applying the ‘juste retour’) it would not get any interest refund… no fiscal transfers…. [Any] write down ]of] the Italian bonds… [would be] purely an accounting operation…. A central bank… does not need equity…. This confusion between accounting losses and real losses… has led to long hesitation to act… leads to bad ideas and wrong proposals…

Morning Must-Read: Paul Krugman: A Tale of Two Pegs

Posted on by Brad DeLong

Paul Krugman: A Tale of Two Pegs: “By the numbers Switzerland’s monetary situation pre-collapse…

…and Hong Kong’s now look remarkably similar…. So is the Hong Kong dollar at risk of a franc-like event? No, it isn’t. There’s not a hint of pressure to drop the currency board. Why is Hong Kong different The answer…is that the institutional setup and history… plays very differently with hard-money ideologues… even though the facts… weren’t very different…. Swiss currency intervention looked to the usual suspects like activist monetary policy, runaway expansion of the central bank’s balance sheet, ‘printing money’ to debase the currency even if the goal was to keep it from getting stronger.

Meanwhile, Hong Kong has a currency board, which is the next best thing to the gold standard, so maintaining the peg… became a demonstration of stern Victorian monetary virtue…. It was the nagging from hard-money types that led to the debacle. Meanwhile, Hong Kong has managed to wrap the very same policy in libertarian clothes, and there’s no problem.

Taxation in the name of equity

Posted on by Nick Bunker

In his State of the Union address last night, President Obama announced a variety of proposals spanning education, housing finance, and the tax system. On that last topic, the president suggested several changes to the federal tax system, including raising the long-run capital gains tax rate. But perhaps the most interesting tax proposal was a tax on borrowing by banks with assets of at least $50 billion. The tax would raise funds, but its larger impact would be on the borrowing behavior of these large banks. A reduction in borrowing would be a boon to economic stability, with the costs borne by some of the best-off people in the U.S. economy.

First, a step back to understand the role of borrowing for banks. Broadly speaking, a business is funded either by debt or equity. Debt is borrowing, either in the form of a loan from a bank or the sale of a bond. Equity is a way to finance a firm by selling an ownership stake in the firm. An equity stake in a firm is better known as a stock share. The main difference between debt and equity is that equity is a much more flexible form of funding. If a business takes a hit to their revenue and they were expecting to pay stockholders a dividend they can just wait until revenues increase. Their valuation may decrease, but the business isn’t immediately in peril. But if this business has to make a debt payment, they must make the payment at the agreed upon time or risk default.

The mix of these two financing options determines the leverage ratio of the firm. The more levered a firm, the more debt the firm has taken on. The higher the ratio, the more profit a company can make on a given amount of earnings. But a higher ratio means that the impact of a loss is amplified. Leverage, in other words, acts like a financial accelerant.

While most businesses take on some leverage, banks as an industry have very high levels of leverage. By taxing borrowing, the Obama administration proposal would attempt to reduce these leverage ratios by discouraging debt and increasing financing through equity.

While this shift might reduce financial instability, how would less borrowing affect the rest of the economy? We often hearing about increased equity funding for banks referred to as banks “holding more capital.” Wouldn’t that mean banks are reducing lending?

The answer is no. Economists Anat Admati of Stanford University and Martin Hellwig of the Max Planck Institute document in their book “The Bankers’ New Clothes” and elsewhere that increased equity funding of banks doesn’t reduce lending. Banks aren’t holding money they already have. They are changing where they get the money from in the first place.

Increased reliance on equity wouldn’t reduce lending, but it would end up reducing bank profits, according to Admati and Hellwig. So there would be some losers from the shift. But the reduction in profits would likely be passed onto stockholders, most of whom are concentrated among at the top of the income ladder. The damage wouldn’t be severe.

The bank borrowing tax proposal isn’t the only way to get banks to reduce their debt financing. The Federal Reserve has required lower leverage ratios in the years since the financial crisis of 2008 and could go further. Regardless of the means, reducing banks’ reliance on debt would be a positive step toward equity, in every sense of the word.

Nighttime Must-Read: Martin Wolf: Chronic Economic and Political Ills Defy Easy Cure

Posted on by Brad DeLong

Martin Wolf: Chronic Economic and Political Ills Defy Easy Cure: “Here… are six enduring conditions of the ‘new  normal’…

…First, deficient demand…. While demand is strengthening in the US and UK, as one might hope after years of aggressive monetary policies, the eurozone remains in a dangerously depressed condition. Meanwhile, Japan has still to escape its deflation trap. Second, stagnant productivity…. Third, fragile finance… in some respects even more fragile than it was before the crisis… the lack of transparency of balance sheets remains daunting….

Fourth, unstable politics. Deteriorating economic performance and rising inequality are generating substantial political stresses…. Fifth, tense geopolitics. Ours is an era of rapid changes in relative economic power, with the rise of China… and the relative decline of Europe and the US. China is assertive; Russia is irredentist; the west is cautious…. Sixth, challenge overload. These stressed political systems confront large domestic and international challenges… the supply of global public goods, which includes preserving the open world economy, peace and the global commons…. Managing climate change is the hardest. Yet 2014 was the hottest year on record.

These conditions are chronic, not critical…. They can, however, be managed…

Things to Read on the Evening of January 20, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. Shane Ferro: Robots Won’t Save Us From Secular Stagnation: “It’s time to welcome our robot overlords, says University of Manchester economist Diane Coyle in the Financial Times.… Coyle gives the historical example of the washing machine…. Sure, if the robots come and take everyone’s jobs, but then people find ways to work the same amount doing different things, productivity will increase drastically. The economy will probably boom. But this assumes that nothing blows up the global economy before we get to that point…. If low interest rates continue to create asset bubbles that then pop dramatically–which seems to be the real fear of some people who are talking about secular stagnation–the economy could be in rough shape for a long time before the robot (or demographic) saviors come. It is possible to be afraid of robots and of asset bubbles at the same time.”

  2. Mike Konczal sends us to:

    Danny Yagan: Capital Taxes and the Real Economy: The 2003 Dividend Tax Cut: “Policymakers frequently propose to use capital tax reform to stimulate investment and increase labor earnings. This paper tests for such real impacts of the 2003 dividend tax cutó one of the largest reforms ever to a U.S. capital tax rateó using a quasi-experimental design and a large sample of U.S. corporate tax returns from years 1996-2008. I estimate that the tax cut caused zero change in corporate investment, with an upper bound elasticity with respect to one minus the top statutory tax rate of .08 and an upper bound e§ect size of .03 standard deviations. This null result is robust across speciÖcations, samples, and investment measures. I similarly Önd no impact on employee compensation. The lack of detectable real e§ects contrasts with an immediate impact on Önancial payouts to shareholders. Economically, the Öndings challenge leading estimates of the cost-of-capital elasticity of investment, or undermine models in which dividend tax reforms a§ect the cost of capital. Either way, it may be di¢ cult for policymakers to implement an alternative dividend tax cut that has substantially larger near-term e§ects.”

  3. Paul Krugman: The European Scene: “The ECB’s plan… the German media are already howling, with Bild warning that Draghi’s expected actions will reduce the pressure for reform in ‘crisis-hit countries such as… France.’… Look at ‘crisis-hit’ France; investors are so worried about France that they won’t hold its bonds unless offered, um, 0.64 percent, the lowest rate in history. But never mind… the French must be in crisis, because they still believe in social insurance, and besides, they’re French. Notice also that crisis-hit Spain is now paying a lower interest rate than Britain…. This should… put an end to all the talk about how low British rates are the reward for austerity, and so on…. Very low rates reflect market expectations that (a) the European economy will remain very weak and (b) that the ECB will continue to fall far short of its inflation target…. The market is saying both that there are very few good investment opportunities out there–few enough that paying the German government to protect the real value of your wealth is a good move–and that inflation over the next five years will be around 0.4 percent, not the target of 2 percent…. The markets don’t believe that the US is immune to these ills. Market expectations of inflation… have fallen off a cliff…. [Yet] Fed officials seem weirdly complacent…”

Should Be Aware of:

 

  1. Tim Murphy: Mike Huckabee’s PAC Paid His Family Almost $400,000: “Huck PAC… ‘is committed to electing conservatives across the nation at all levels of government’…. Since its inception, Huck PAC has never spent more than 12 percent of its funds on candidates or other PACs. It gave only 5 percent of its revenues—that is $47,000 of $1,063,142—to candidates during the 2012 cycle…. Last July, Politico reported on Huckabee’s penchant for charging state Republican parties for expensive, chartered flights—$15,944 for one trip to Iowa—when traveling for meetings and fundraisers. In 2009, an Alabama congressional candidate was forced to take out a loan after Huckabee’s $33,990 speaking fee ended up costing more than the candidate had raised at the fundraiser…”

  2. Jamelle Bouie: Robert E. Lee Day: “This is the Gen. Robert E. Lee who led Confederate armies in war against the United States, who defended a nation built on the ‘great truth’ that the ‘negro is not equal to the white man,’ and whose armies kidnapped and sold free black Americans whenever they had the opportunity…. He sold children and oversaw brutal punishments, including sewing brine into the wounds of returned fugitives…. ‘If the image of Lee changes in history, the man himself did not, even in the face of the greatest provocations,’ writes Paul Greenberg for the Arkansas-Democrat Gazette in its annual editorial on the life of Lee, ‘His victories were great, but his honor greater.’”

  3. Lauren Davis: He Went In For A Tune-Up And Came Out With A Full Cerebral Upgrade): “As the mask clicked over his face and the new neural pathways lit up, Zourn immediately wondered if he had paid too much for the upgrade. ‘That’s normal,’ the tech told him as she gave his mask a quick polish. ‘The upgrade makes you a savvier shopper, but only after we’ve debited your account.'”

  4. Mark Joseph Stern: American Sniper Lawsuit: Chris Kyle Told Lies About Jesse Ventura: “The Ventura story wasn’t true, and Ventura meant to prove it. So he took Kyle to trial, suing him–and, after he died, his estate…. On July 29, 2014, a federal jury returned from six days of deliberations to award Ventura $1.845 million in damages…. Kyle’s widow… is currently appealing the decision; her odds of winning appear quite low. All of this presents a very big problem for HarperCollins…. Ventura brought another lawsuit for unjust enrichment, this time against HarperCollins. The lawsuit explains that while Kyle is the one who defamed Ventura, HarperCollins played up those defamatory statements in order to boost its sales—and with reckless disregard to the truth of Kyle’s claims. This suit is the second of Ventura’s one-two punch, and from here, it looks like a knockout. During the first trial, Ventura’s attorneys uncovered records of HarperCollins’ negligence in fact-checking Kyle’s book, as well as evidence that HarperCollins specifically touted the Ventura story to drum up publicity…”

  5. Charles Pierce: Ron Fournier’s Idiocy Reappears As He Attempts To Counsel President Obama On Progress And Partisan Gains: “Tell me I didn’t call this 150 words ago. The areas of ‘potential agreement’ that Clinton found involved repealing the Glass-Steagall Act and deregulating the commodities futures market. I don’t think we should burn down the world economy so that Ron Fournier can feel comfortable about how well the system works…”

Secular Stagnation Once Again: A Few Cocktail-Hour Thoughts on Shane Ferro vs. Diane Coyle: Daily Focus

Posted on by Brad DeLong

Apropos of Shane Ferro vs. Diane Coyle…

First, “secular stagnation” was a bad phrase for Larry Summers to have chosen to label what he wants to talk about. It is true that it was the phrase used by Alvin Hansen when he worried about a very similar thing at the end of the 1930s. And it is true that the root cause of what worried Hansen was his fear that technological progress had reached its culmination point–hence that future high return investments would be scarce. But what Hansen and Summers both worry about is not the absence of rapid technological progress per se.

What they both worry about is the possibility of a world in which, when investors have realistic expectations, total desired investment spending is lower than total economy-wide planned saving at full employment, even when were the safe nominal interest rate to fall to zero. If so, then full employment can only be attained if it is accompanied by unrealistically optimistic expectations by investors–bubbles, which then pop, doing unbelievable amounts of damage.

Such “badly behaved investment demand and savings supply functions”, as Marty Feldstein called them when he taught me this stuff the first time I saw it back in the winter of 1980, can have four causes:

  1. Technological stagnation, which lowers the social and private rate of return on investment and pushes desired investment spending down too far.
  2. Limits on societal investment absorption coupled with rapid declines in the prices of investment goods, which together put too much downward pressure on the feasible profitable share of investment spending.
  3. Technological inappropriability, in which the market cannot figure out how to properly reward those who invest in new technologies even when they have enormous social returns, which also lowers the private rate of return on investment and pushes desired investment spending down too far.
  4. High income inequality, which boosts the desired savings share of production as the only things the superrich can thank of to do with their wealth is to bless their heirs or play status games with each other, which pushes planned savings up too much.
  5. Inflation too low, which means that even a zero safe nominal rate of interest is too high a real rate of interest to balance desired investment and planned savings at full employment.
  6. Broken finance, which fails to properly mobilize the risk-bearing capacity of society and so drives too large a wedge between the risky returns on real investments and the safe interest rate on the debt of trustworthy sovereigns.

Of these six, robots would prevent (1), could cause (2), and are not terribly relevant to (3)-(6).

I think the big problem is (6), aided by (5). Larry Summers seems to think the big problem is some mix of (2)-(4)–and that, for reasons I don’t fully understand but are connected with bubbles and money illusion, resolving (5) by a higher inflation target is likely to make things worse…

Shane Ferro:

Shane Ferro: Robots Won’t Save Us From Secular Stagnation: “It’s time to welcome our robot overlords, says University of Manchester economist Diane Coyle in the Financial Times.…

Coyle gives the historical example of the washing machine…. Sure, if the robots come and take everyone’s jobs, but then people find ways to work the same amount doing different things, productivity will increase drastically. The economy will probably boom. But this assumes that nothing blows up the global economy before we get to that point…. If low interest rates continue to create asset bubbles that then pop dramatically–which seems to be the real fear of some people who are talking about secular stagnation–the economy could be in rough shape for a long time before the robot (or demographic) saviors come.

It is possible to be afraid of robots and of asset bubbles at the same time.

Evening Must-Read: Shane Ferro: Robots Won’t Save Us From Secular Stagnation

Posted on by Brad DeLong

Shane Ferro: Robots Won’t Save Us From Secular Stagnation: “It’s time to welcome our robot overlords, says University of Manchester economist Diane Coyle in the Financial Times.…

Coyle gives the historical example of the washing machine…. Sure, if the robots come and take everyone’s jobs, but then people find ways to work the same amount doing different things, productivity will increase drastically. The economy will probably boom. But this assumes that nothing blows up the global economy before we get to that point…. If low interest rates continue to create asset bubbles that then pop dramatically–which seems to be the real fear of some people who are talking about secular stagnation–the economy could be in rough shape for a long time before the robot (or demographic) saviors come.

It is possible to be afraid of robots and of asset bubbles at the same time.

Lunchtime Must-Read: Danny Yagan: Capital Taxes and the Real Economy: The 2003 Dividend Tax Cut

Posted on by Brad DeLong

Mike Konczal sends us to:

Danny Yagan: Capital Taxes and the Real Economy: The 2003 Dividend Tax Cut: “Policymakers frequently propose to use capital tax reform…

…to stimulate investment and increase labor earnings. This paper tests for such real impacts of the 2003 dividend tax cutó one of the largest reforms ever to a U.S. capital tax rateó using a quasi-experimental design and a large sample of U.S. corporate tax returns from years 1996-2008. I estimate that the tax cut caused zero change in corporate investment, with an upper bound elasticity with respect to one minus the top statutory tax rate of .08 and an upper bound e§ect size of .03 standard deviations. This null result is robust across specifications, samples, and investment measures. I similarly find no impact on employee compensation.

The lack of detectable real effects contrasts with an immediate impact on financial payouts to shareholders. Economically, the findings challenge leading estimates of the cost-of-capital elasticity of investment, or undermine models in which dividend tax reforms a§ect the cost of capital. Either way, it may be difficult for policymakers to implement an alternative dividend tax cut that has substantially larger near-term effects.

North Atlantic Bond Markets and the Near-Term Macroeconomic Outlook: Daily Focus

Posted on by Brad DeLong
FRED Graph FRED St Louis Fed

In my view, the best way to understand what has happened to the U.S. bond market over the past six months is this:

The bond market has continued to believe the four things it started believing in mid-2013, at the time of the taper tantrum:

  1. The FOMC believes in an expectational Phillips Curve with a natural rate of unemployment below but near to where it is today, hence inflation is going to start rising slowly after next year when the unemployment rate crashes through the NAIRU heading down.
  2. The FOMC believes that the expectational Phillips Curve is relatively flat, and so the pace at which inflation is going to start rising will be very slow.
  3. The FOMC will explain away any failures of inflation to rise over the next four years or so as due to specific factors, and not revisit its view of the appropriate interest rate path until late in this decade.
  4. Thus the FOMC will raise interest rates, and the average 3-Month Treasury Bill rate over the next five years will not be the 0.4%/year or so expected before the taper tantrum but rather something like 1.4%/year.

And over the past six months the market has come to believe:

  1. The FOMC’s policies are and will be too tight for it to hit its 2%/year inflation rate target over the next five years.
  2. Rather, the FOMC’s policies will produce an average inflation rate of 1.3%/year over the next five years–a cumulative undershoot in nominal demand by an additional 3.5%-points.
  3. But because the FOMC will not realize its policies are too tight–will explain away the quarter-by-quarter undershoots as due to special factors until late in this decade–investments in 5-Year Treasury notes will produce positive real returns, an expectation not held since 2010.

And, as near as I can see, the FOMC factions believe:

  1. Interest rates need to be raised now so that commercial banks can return to their normal business models and not be forced to attempt profitability via the reach for yield by making risky loans that they cannot properly evaluate.
  2. The market’s macro expectations are less well-informed than those of the Fed staff, and should be ignored as reflecting fads and fashions, panic and exuberance.
  3. All or nearly all of the excess 2%-point decline in prime-age male labor-force participation over and above long-term trends is not or is no longer “cyclical”, in that these missing male workers cannot be pulled back into the labor force unless the economy becomes one of such high pressure as to produce unacceptable inflation.
  4. All or nearly all of the excess 1.5%-point decline in prime-age female labor-force participation over and above the declining structural trend that (perhaps) began in 2000 is not or is no longer “cyclical”, in that these missing female workers cannot be pulled back into the labor force unless the economy becomes one of such high pressure as to produce unacceptable inflation.
  5. It is not worth running any inflation risks to find out whether our views are correct or not.
FRED Graph FRED St Louis Fed

From my perspective, all I can think is that the FOMC hs fallen victim to a form of groupthink in which it really does not understand the situation and the risks. The members of the FOMC who seek primarily to normalize interest rates out of a concern for the commercial banking sector do not understand:

  1. Expectations of normal inflation rates and full employment need to proceed interest rate increases.
  2. If they do not premature interest-rate increases will have to be rapidly reversed.
  3. And the time spent near the ZLB will be even longer.

The members of the FOMC who seek optimal control do not understand:

  1. How uncertain we are right now about the current state of the economy.
  2. How uncertain we are right now about the current structure of the economy.
  3. How even if the bond market’s shift over the past six months in its expectations is not a good rational forecast, it is nevertheless a major leftward shift in the IS curve that needs to be neutralized by someone.
  4. How dire the situation in Europe is.
  5. How much of the linkages across the Atlantic are due not to (small) trans-oceanic trade flows and their influence on aggregate demand, but rather to psychological animal-spirits contagion.

Paul Krugman is on the case:

Paul Krugman: The European Scene: “The ECB’s plan… the German media are already howling…

The European Scene NYTimes com

…with Bild warning that Draghi’s expected actions will reduce the pressure for reform in ‘crisis-hit countries such as… France.’… Look at ‘crisis-hit’ France; investors are so worried about France that they won’t hold its bonds unless offered, um, 0.64 percent, the lowest rate in history. But never mind… the French must be in crisis, because they still believe in social insurance, and besides, they’re French. Notice also that crisis-hit Spain is now paying a lower interest rate than Britain…. This should… put an end to all the talk about how low British rates are the reward for austerity, and so on….

Very low rates reflect market expectations that (a) the European economy will remain very weak and (b) that the ECB will continue to fall far short of its inflation target…. The market is saying both that there are very few good investment opportunities out there–few enough that paying the German government to protect the real value of your wealth is a good move–and that inflation over the next five years will be around 0.4 percent, not the target of 2 percent….

The markets don’t believe that the US is immune to these ills. Market expectations of inflation… have fallen off a cliff…. [Yet] Fed officials seem weirdly complacent…

947 words

Capital taxation: What is it good for?

Posted on by Casey Schoeneberger

President Obama tonight will announce a proposed change to the U.S. tax system that would make it much more progressive. The plan would reduce the amount of federal taxes paid by middle-income earners while increasing taxes for those at the top of the wealth and income ladder.

The proposal has three main changes to the tax system for those at the top. The first would eliminate the so-called step-up in basis for taxes on capital gains. When a person inherits, say, a large amount of stock holdings from a parent, the inheritor is only taxed on the gains made after they inherit the stocks. So if a parent bought a stock at $1 and it appreciates to $99 before the child receives the stock, then the child would only be taxed on the gains over $99. This is how large amounts of wealth are passed untaxed from generation to generation.

The second proposal would levy a small tax on large banks when they borrow money. This proposed reform is designed to reduce bank borrowing to increase the stability of the financial system. In modern finance, banks no longer rely solely on deposits to amass the capital needed to lend money, instead borrowing increasing amounts of money for lending purposes, which in modest amounts is not risky but threatens financial stability when overdone.

The third would increase the tax rate on long-term capital gains. This last proposed reform is particularly important for policymakers to consider, but first let’s examine the economic thinking around taxing capital gains.

The most famous way economists think about capital taxation is known as Chamley-Judd model, named after several papers first penned in the mid-1980s by economists Christopher Chamley of Boston University and Stanford University’s Kenneth L. Judd. The general thrust of these papers is that individuals in the economy are extremely forward looking when it comes to their savings decisions and therefore capital formation. Capital gains taxes would have a negative impact on the long-run growth potential of the economy by reducing savings-induced investments and capital formation, therefore lowering the potential living standards of workers.

In short, the model finds that the supply of capital is infinitely elastic to changes in the capital taxation rate, which means the long-run supply of savings and capital would change drastically depending on the tax rate. And when something has an infinite elasticity, it makes no sense to tax that good or activity at all because the reduction would be, well, infinite.

But policymakers and economists alike need to consider whether we are really in an infinite elasticity world. First, a paper by economists Thomas Piketty at the Paris School of Economics and Emmanuel Saez at the University of California-Berkeley builds a model of capital taxation that accounts for a variety of real-world factors and accurately accounts for a several empirical facts. They find an optimal capital tax rate that is larger than zero. So Chamley-Judd’s supremacy in discussions about capital taxation may not be warranted.

What’s more, a few quick glances at several types of data also cast doubt on the assumptions that inform the Chamley-Judd model. As Piketty and Saez point out in their paper, if those assumptions are correct, then we should see large swings in the capital-income ratio as tax rates change. But we don’t see that in the data.

Finally, based on the Chamley-Judd model, the savings rates of the rich (those who hold most of the capital) should be quite sensitive changes in tax rates. But as Slate’s Jordan Weissmann points out, there doesn’t seem to be much of a relationship. Similarly, economist Len Burman, the director of the Tax Policy Center, finds no relationship with economic growth.

All of this isn’t to say that capital taxation is a free lunch. At high enough levels it certainly would have negative consequences. But the idea that any level of capital taxation would be an immense problem for long-run economic growth seems to be a misplaced concern.