Edward Conard

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Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, January 8, 2019

AI Summary. Despite top marginal tax rates of 70–91% in the 1960s, the superrich paid an average federal tax rate under 30%, and the all-inclusive rate on the top 1% today is only about 6 points lower than in the post-war decades. Little is known about how higher rates affect long-term taxpayer behavior.

James Pethokoukis American Enterprise Institute
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Taxes on the rich were not much higher in the 1950s. Despite top tax rates ranging from 91% to 70%, the superrich paid an average federal tax rate of less than 30%. @JamesPethokoukis

Did high top tax rates actually make the rich pay much more?

Core argument: Despite top statutory tax rates of 70–91% in the 1960s, the superrich paid an average federal tax rate of less than 30%, and the all-inclusive rate for the top 1% today is only about 6 points lower than in the post-war decades.

In the 1960s, despite top tax rates ranging from 91% to 70%, the superrich paid an average federal tax rate of less than 30%. The all-inclusive tax rate for the top 1% today is only about 6 points lower than in the post-war decades. The US economy then was bolstered by factors beyond tax rates, such as post-war economic dominance, productivity advances from the 1920s and 1930s, and strong labor force growth. Concerns about the economic impact of higher tax rates remain, as little is known about their long-term effects on taxpayer behavior and economic dynamics. Reducing the potential for wealth accumulation through high taxes could influence risk-taking and career choices, which are crucial for economic growth.

Takeaways by Macro Roundup® AI

  1. Despite top statutory tax rates of 70–91% in the 1960s, the superrich paid an average federal tax rate of less than 30%, and the all-inclusive rate for the top 1% today is only about 6 points lower than in the post-war decades.
  2. The post-war US economy was bolstered by factors beyond tax rates, including post-war economic dominance, productivity advances carried over from the 1920s and 1930s, and strong labor force growth.
  3. Little is known about the long-term effects of higher tax rates on taxpayer behavior and economic dynamics, and reducing the potential for wealth accumulation through high taxes could influence risk-taking and career choices that matter for economic growth.

James Pethokoukis, "Before we consider cranking up tax rates, let’s have a smart debate," American Enterprise Institute, January 7, 2019, https://www.aei.org/economics/before-we-consider-cranking-up-tax-rates-lets-have-a-smart-debate/

Before we consider cranking up tax rates, let’s have a smart debate

It now seems there’s going to be a national conversation about whether top federal tax rates should be dramatically higher. And for that you can partially credit first-term House member Alexandria Ocasio-Cortez — as well as the extreme media attention given to her every policy utterance. But only partial credit here. At a time of a) high national debt that’s heading even higher, and b) increased inequality — including the creation of some truly massive personal fortunes — it’s a discussion that was probably inevitable.

Before we consider cranking up tax rates, lets have a smart debate: Extended Excerpt Image 1


And here’s hoping that discussion is informed and substantive. Unfortunately, early signs give reason for doubt. For instance: Pointing to past periods in American economic history that experienced both high individual marginal tax rates and strong economic growth is hardly dispositive. Not many people paid those high marginal rates or anything close. During the 1960s — a period when the top tax rate varied between 91 percent and 70 percent — the superrich paid an average federal tax rate of less than 30 percent. More broadly, notes the Tax Foundation, the all-inclusive tax rate (federal, state, local) is only about a half dozen points lower today for the top 1 percent of taxpayers than in those immediate post-war decades.

And there was a lot more happening back then with the American economy and growth than just the impact of tax rates, whether good or bad. Spared the ravages of war, the US was the planet’s economic colossus. It also benefited from a wave of productivity advances in the 1920s and 1930s that didn’t fully play out until after the war. Finally, unlike today, economic growth during those decades was greatly helped along by demographics in the form of strong labor force growth.

Also worrisome: the frantic hand-waving away of concerns about the possible unwanted economic impact from much higher taxes rates. Little is understood about the long-term impact of very high tax rates on taxpayer behavior and the economy. Those are as important as they are hard to measure. America, in particular, benefits greatly from people who take risks and make career choices influenced to some degree by hopes of striking it rich. “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” my AEI colleagues Aparna Mathur, Sita Slavov, and Michael Strain argue in their 2012 research note “Should the Top Marginal Income Tax Rate Be 73 Percent?”

But it’s early, and as this debate continues perhaps the quality will improve.

AI Summary. Taxpayers were billed $27.2tn for federal services that cost $35.6tn over a decade, a 26% undercharge that added more than $9tn to the national debt. The author argues this makes government services appear cheaper than they are, encouraging further deficit-financed spending.

Steve Hanke and Stephen Walters Wall Street Journal
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Taxpayers were billed $27.2tn for federal services that actually cost $35.6tn, a 26% undercharge adding over $9tn to the national debt.

Does undercharging taxpayers for government services encourage more deficit spending?

Core argument: U.S. taxpayers were billed $27.2tn for federal services that cost $35.6tn over the past decade, a 26% undercharge that added more than $9tn to the national debt.

Over the past decade, taxpayers were billed $27.2tn for federal services that actually cost $35.6tn, resulting in a 26% undercharge and adding over $9tn to the national debt. This discrepancy makes government services appear cheaper, fueling the popularity of socialist policies. The unfunded liabilities of Social Security and Medicare are projected at $50tn over 75 years, with the total U.S. fiscal gap estimated to be more than four times that amount. Closing this gap would require a tax increase of over 60%. As many Americans pay only a minimal share of government costs, the illusion of affordability persists, encouraging further deficit spending and misallocation of capital. This cycle of "lying prices" leads to increased government spending and a growing acceptance of debt-financed policies, despite the long-term economic risks.

Takeaways by Macro Roundup® AI

  1. U.S. taxpayers were billed $27.2tn for federal services that cost $35.6tn over the past decade, a 26% undercharge that added more than $9tn to the national debt.
  2. Unfunded liabilities of Social Security and Medicare are projected at $50tn over 75 years, with the total U.S. fiscal gap estimated at more than four times that amount, and closing it would require a tax increase of over 60%.
  3. Because many Americans pay only a minimal share of government costs, "lying prices" make federal services appear cheaper, encouraging deficit spending, misallocation of capital, and acceptance of debt-financed policies.

“…Recent history demonstrates that the price of each new government program rarely tells the whole story. In the past decade taxpayers were charged $27.2 trillion for federal services that cost $35.6 trillion, adding more than $9 trillion to the national debt. Our tax bills told us that Uncle Sam’s good works were about 26% cheaper than their real cost.And Sam’s nose is growing thanks to rising deficit projections and the unfunded future costs of entitlements like Social Security and Medicare. Official projections put the present value of these two unfunded liabilities at $50 trillion over the next 75 years. Boston University economist Laurence Kotlikoff calculates that the total U.S. fiscal gap is more than four times that amount and that closing it would require a tax hike of more than 60%. Many Americans pay a minimal share of even the apparent cost of government, so it’s no surprise that socialist ideas are becoming more popular. Big government looks like a bargain….”

Lying Prices Keep America Hooked on Spending

Margaret Thatcher famously said the problem with socialism is that you “always run out of other people’s money.” The trouble with resisting socialism is that until the money runs out, free-spending progressive policies are remarkably seductive. Their appeal comes from what economists call lying prices: advertised prices that don’t reflect the full cost of what you’re buying.

When prices lie, people make bad choices—especially when they think something is free. Take rush-hour commutes. We jump in our cars hoping for a quick trip only to find the streets clogged; with access priced at zero, demand exceeds supply. Absent a price signal to encourage carpooling or other alternatives, we creep, beep and waste huge amounts of time and fuel. Transportation consulting firm Inrix tallied up the cost of this waste in a study last year, calculating that $305 billion of value was burned in traffic across the U.S. in 2016, with the typical Los Angeleno wasting more than $2,800.

For many politicians, lying prices are actually a goal. Policies that set dishonest prices or fudge budgets can fuel the growth of government and lure voters leftward. Sen. Bernie Sanders and his socialist followers use such sleight of hand to obscure the vast costs of proposals for “free college” and “Medicare for all.”

Recent history demonstrates that the price of each new government program rarely tells the whole story. In the past decade taxpayers were charged $27.2 trillion for federal services that cost $35.6 trillion, adding more than $9 trillion to the national debt. Our tax bills told us that Uncle Sam’s good works were about 26% cheaper than their real cost.

And Sam’s nose is growing thanks to rising deficit projections and the unfunded future costs of entitlements like Social Security and Medicare. Official projections put the present value of these two unfunded liabilities at $50 trillion over the next 75 years. Boston University economist Laurence Kotlikoff calculates that the total U.S. fiscal gap is more than four times that amount and that closing it would require a tax hike of more than 60%.

Many Americans pay a minimal share of even the apparent cost of government, so it’s no surprise that socialist ideas are becoming more popular. Big government looks like a bargain.

Escalating debt will bring predictable consequences, which include crushing interest payments that crowd out other spending and misallocation of capital, which saps productivity. Yet most politicians continue to put voters at ease by advertising lying prices for current and future spending. Even many Republicans seem content to pile on debt and spend their children’s money. How’s that for “taxation without representation”?

Is there a way out of this moral and fiscal quagmire? In the 1980s Milton Friedman championed a balanced-budget amendment to the Constitution. One version passed overwhelmingly in the Senate in 1982 but failed to secure the necessary two-thirds majority in the House. That was as close as Friedman’s dream would get to reality. Economists John Merrifield and Barry Poulson have called for a limited constitutional convention to propose a balanced-budget amendment. Twenty-eight states have standing calls for such a convention—six shy of the needed 34.

It’s tempting to think that such an amendment would make an honest republic of us and deprive the spreading socialist grass fire of oxygen. Politicians seeking Medicare for all, free college, subsidized housing and guaranteed jobs would be forced to convince taxpayers to pony up $40 trillion according to the Center on Budget and Policy Priorities. Good luck with that. “Free” sells itself, but honest prices get a hard look.

Yet even if an amendment was ratified—which would require the assent of 38 state legislatures—it wouldn’t be enough to assure honest pricing of government. Current unfunded liabilities show how skilled politicians and bureaucrats have become in lying “off the books.”

It is foolish to hope that the Democratic Party will join in reversing this trend any time soon. As it has moved left, it has embraced ever more deceptive prices for reforms to government services, labor (Fight for $15!), health care, higher ed, housing and much else.

This is a cynical strategy, and it creates a dangerous political feedback loop. First, progressive thinking leads to bigger, debt-financed government. But debt-financed government, and the lying prices it embodies, also can lead to more progressive thinking. Absent honest signals about government’s full costs, more voters are likely to shrug and assume it’s a good buy.

The late economist William Niskanen documented the relationship between deficits and spending, showing that attempts to “starve the beast” of big government via tax cuts don’t work: As tax receipts decrease, spending rises. In his words, “a tolerance for deficits leads to increased government spending.” Polls confirm this trend. Since 2011 the proportion of voters who worry “a great deal” about federal spending and deficits has fallen from 64% to 51%, while the national debt has risen 45%.

Before such tolerance for debt and a concomitant fondness for “freebies” afflicts a majority of the electorate, it would be wise for the party of Lincoln to seize the political, fiscal and moral high ground, steer clear of lying prices, and rebrand: Goodbye, Grand Old Party, and hello “Honest Abe Party.” Attempting to out-lie the Democrats is, in the long run, unlikely to be successful politically, and certain to be disastrous economically.

Steve Hanke and Stephen Walters, "Lying Prices Keep America Hooked on Spending,"Wall Street Journal, January 7, 2019, https://www.wsj.com/articles/lying-prices-keep-america-hooked-on-spending-11546908833

AI Summary. A period of falling unemployment and a tighter labor market coincided with faster average hourly earnings growth while the Federal Reserve's preferred inflation gauge rose only modestly from 1.5% to 2%. This suggests employers absorbed higher labor costs rather than passing them to consumers, compressing historically high profit margins and pushing firms to seek efficiency gains.

Jared Berstein Washington Post
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The unemployment rate fell significantly from 2014-2018, leading to a tighter labor market & increased Average Hourly Earnings. Employers absorbed higher labor costs, potentially reducing profit margins, & sought efficiency gains to offset rising costs.

Does full employment raise wages without driving up inflation?

Core argument: During 2014–2018, the U.S. unemployment rate fell significantly and average hourly earnings rose, while the Federal Reserve's preferred inflation gauge increased modestly from 1.5% to 2%, in line with its target.

During 2014-2018, the unemployment rate fell significantly, leading to a tighter labor market and increased Average Hourly Earnings (AHE). The Federal Reserve's preferred inflation gauge rose modestly from 1.5% to 2%, aligning with its target, yet employers did not pass higher labor costs onto consumers as much as before. This suggests that businesses absorbed these costs, potentially reducing profit margins, which had been historically high. The high-pressure labor market forced employers to seek efficiency gains to offset rising labor costs, as weak worker bargaining power at higher unemployment rates previously allowed them to maintain profit margins without increasing pay. This shift underscores the relationship between full employment and wage growth, highlighting how a robust labor market can drive productivity improvements and alter income distribution dynamics.

Takeaways by Macro Roundup® AI

  1. During 2014–2018, the U.S. unemployment rate fell significantly and average hourly earnings rose, while the Federal Reserve's preferred inflation gauge increased modestly from 1.5% to 2%, in line with its target.
  2. Employers passed less of their higher labor costs onto consumers than in the past, suggesting that businesses absorbed those costs and reduced profit margins that had been historically high.
  3. The high-pressure labor market pushed employers to seek efficiency gains to offset rising labor costs, whereas weaker worker bargaining power at higher unemployment rates had previously let them hold margins without raising pay.

Jared Berstein, "A little graph with a big message: Full employment raises wages,"Washington Post, January 7, 2019, https://www.washingtonpost.com/outlook/2019/01/07/little-graph-with-big-message-full-employment-raises-wages/

"...Over the period covered by the figure (2014-18), the Federal Reserve’s preferred inflation gauge rose from about 1.5 percent to 2 percent. That’s an increase, but not much of one, and it merely brings inflation to the Fed’s 2 percent target. For whatever reason, employers paying higher labor costs haven’t been passing those costs forward to consumers as much as they used to.This has two implications. First, it implies that higher labor costs could take a bite out of business profits. If so, that’s a good thing from my perspective (though the stock market disagrees), as the profit share of national income has been historically high in recent years (and labor’s share has thus been low). Second, and this is a particularly interesting potential result, employers finding themselves in an unusually high-pressure labor market may be forced to find efficiency gains to offset the higher labor costs, especially if they’re unwilling to raise prices very much. Why, if they could find such gains, did they not do so earlier? Because weak worker bargaining clout at higher unemployment rates meant employers didn’t need to raise pay and, thus, didn’t need to be more productive to maintain their profit margins. Now, they either discover those efficiencies, pass on price increases or face smaller profit margins....."

Labeled points, MM/YY and included R Squared. Sheet attached.

Steve Comment: Labeled points, added regression to chart. Data is attached.

Ed: Comment: Please show me the data/label the points?

Steve Comment: He did not, I did. I just downloaded the two series from FRED I though he used (they look very very close) Civilian Unemployment Rate, Percent, Monthly, Seasonally Adjusted Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private, Percent Change from Year Ago, Monthly, Seasonally Adjusted And then ran the regression in excel.

Ed Comment:Did bernstien publish that correlation or someone else? where is you info coming from?

Ed Comment:I like the concept, but I don’t fully understand the graph and there’s lots that can go wrong with the analysis. What are the data points? I’d like to see them labeled. Why stop at 14? And why would wages rise with 7% unemployment (other than low-wages workers ae the first to lose their jobs which is unrelated to the point the analysis is purporting to show)? I don’t love the title (which Bernstien never uses in his post) because it’s liberal. It means: don’t count on growth to raise wages (i.e., the have to be raised thru government). But that might only be true because of trade with low-wage economies, low-skilled immigration, and a growing slacker economy. it so, that implies an entirely different solution than “it takes really low unemployment to raise wages.”

Steve Comment: So I think I ~ what he did. This is (# via FRED) AHE % Change Y/Y for Production and non-supervisory employees against the civilian UI rate for the time period he cited If you do a simple regression with the UI as the independent variable and the AEH % Change Y/Y as the dependent the relationship isn't that strong R Square of.273

AI Summary. New quarterly series of total hours worked for 17 OECD countries indicate that employment is a poor proxy for cyclical labor input, with about 50% of labor adjustment occurring through hours per worker rather than headcount. The authors find Western European recessions featured small labor wedges and large productivity shocks relative to the US.

Lee E. Ohanian National Bureau of Economic Research
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Data on total hours worked in OECD countries reveals that employment is a poor proxy for cyclical labor input, with 50% of labor adjustment occurring along the intensive margin. @LeeEOhanian, @nberpub.

Does employment accurately measure cyclical changes in labor input?

Core argument: Newly constructed quarterly series of total hours worked for 17 OECD countries indicate that employment is a poor proxy for cyclical labor input, with about 50% of labor adjustment occurring along the intensive margin.

Labor fluctuations are central to business cycle research, yet traditionally only employment data, not total hours worked, has been available for many OECD countries. This study constructs quarterly time series of total hours worked for 17 OECD countries, revealing that employment is a poor proxy for cyclical labor input, as about 50% of labor adjustment occurs along the intensive margin. In Western Europe, employment fluctuations are high compared to the US due to higher hiring and firing costs, leading to high employment-based labor wedge fluctuations. During the Great Recession, Western European recessions showed small labor wedges and large productivity shocks compared to the US. These findings challenge common views on cyclical labor market dynamics and suggest that future research should focus on understanding the intensive margin adjustment and labor wedge variations during recessions.

Takeaways by Macro Roundup® AI

  1. Newly constructed quarterly series of total hours worked for 17 OECD countries indicate that employment is a poor proxy for cyclical labor input, with about 50% of labor adjustment occurring along the intensive margin.
  2. Western European employment fluctuations are high relative to the US because of higher hiring and firing costs, yielding high employment-based labor wedge fluctuations.
  3. During the Great Recession, Western European recessions featured small labor wedges and large productivity shocks compared with the US.

will have to reach-out to the authors to get the data the economist used to build their tables, not currently online (2011 paper) but clearly they have been tracking"...Labor fluctuations are a central focus of business cycle research, but this has been limited by the fact that typically only employment, rather than total hours worked, is available for many OECD countries. This paper has constructed quarterly time series of total hours worked for 17 OECD countries, with a focus on constructing hours that are consistent with national income and product account constructs. These hours measures provide new data for earlier years that can shed light on a number of questions involving comparisons over time, including changes in the nature and sources of fluctuations over time, how changes in fscal and monetary policy have impacted fluctuations over time, and how changes in labor market regulations have impacted fluctuations over time. The results reported here stand in sharp contrast to many common views about cyclical labor market dynamics. Specifically, these new data indicate that employment is a poor proxy for cyclical labor input, and consequently provides poor measures of productivity, as in many OECD countries about 50 percent of labor adjustment occurs along the intensive margin. Employment fluctuations in much of Western Europe appear to be much too high compared to the US, given much higher hiring and hring costs in Europe. And given the large fluctuations in European hours, employment-based labor wedge fluctuations in Europe are too high, and hours-based labor wedge fluctuations are too low. Our findings also have implications for the international Great Recession. Specifically, there is a common view that the Great Recession across countries was the result of very similar responses to very similar banking crises. The findings presented here contrast with that view, as Western European recessions feature very small labor wedges compared to the US, measured either with employment or hours, and instead feature much larger productivity shocks than the US. The data presented here will aid future research in addressing these puzzles, with a focus on understanding why the intensive margin adjustment is not larger during European recessions, why labor wedges are so small in many European countries during the Great Recession, and why they are so large in the US...."
Lee E. Ohanian, Andrea Raffo, "Aggregate Hours Worked in OECD Countries: New Measurement and Implications for Business Cycles," National Bureau of Economic Research, September 2011, https://www.nber.org/papers/w17420

Wednesday, January 9, 2019

AI Summary. U.S. exports of manufactured goods to China have declined as a share of both Chinese and U.S. GDP, failing to keep pace with China's economic growth. The pattern suggests China's import substitution strategy is reducing its reliance on American manufactured goods.

Brad Setser Council on Foreign Relations
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U.S. exports of manufactured goods to China have declined as a share of both Chinese and U.S. GDP over the past five years, indicating a shift in trade dynamics. @Brad_Setser

Why have U.S. manufactured exports failed to keep pace with China's growth?

Core argument: U.S. exports of manufactured goods to China have declined as a share of both Chinese GDP and U.S. GDP.

Over the past five years, U.S. exports of manufactured goods to China have declined as a share of both Chinese and U.S. GDP, indicating a significant shift in trade dynamics. This trend suggests that China's import substitution strategy may be effectively reducing its reliance on American manufactured goods. Despite China's robust economic growth, which could have driven increased demand for imports, the share of U.S. manufactured exports in China's GDP has not kept pace. This decline highlights potential challenges for U.S. manufacturers in maintaining their competitive edge in the Chinese market, as well as broader implications for the U.S.-China trade relationship. The data underscores the need for U.S. policymakers and businesses to reassess their strategies in engaging with China's evolving economic landscape.

Takeaways by Macro Roundup® AI

  1. U.S. exports of manufactured goods to China have declined as a share of both Chinese GDP and U.S. GDP.
  2. China's import substitution strategy may be reducing its reliance on American manufactured goods, as the share of U.S. manufactured exports in China's GDP has not kept pace with Chinese economic growth.
  3. The decline in U.S. manufactured exports to China points to challenges for U.S. manufacturers in the Chinese market and implications for the broader U.S.-China trade relationship.

The China Fantasy. Useful factoid for China discussion, according to Brad "... exports of manufactures to China were falling both as a share of Chinese GDP and as a share of U.S. GDP over the last five years..."

Brad Setser, "Why Haven't U.S. Exports of Manufactures Kept Pace with China's Growth?" Council on Foreign Relations, January 7, 2019, https://www.cfr.org/blog/why-havent-us-exports-manufactures-kept-pace-chinas-growth

which perhaps suggests that their import substitution strategy is worked

AI Summary. Between 1980 and 2015, middle-skill jobs fell from 60% to 45% of total US employment while high-skill jobs rose from 25% to 35%, a shift attributed to automation and global trade raising demand for cognitive skills and cutting demand for routine manual tasks. Wage polarization intensified, with high-skill workers gaining 20% wage growth over two decades while low-skill wages stagnated.

David Autor Richard Ely Lecture AEA Meeting
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Automation & globalization reshape job landscapes. Middle-skill jobs fell from 60% to 45% of total employment, while high-skill jobs rose from 25% to 35% from 1980 to 2015 @DavidAutor

How have automation and trade reshaped middle-skill employment and wages?

Core argument: Middle-skill jobs fell from 60% to 45% of total employment between 1980 and 2015, while high-skill jobs rose from 25% to 35%.

The transformation of labor markets is evident as automation and globalization reshape job landscapes. From 1980 to 2015, employment in middle-skill jobs fell from 60% to 45% of total employment, while high-skill jobs rose from 25% to 35%. This shift is driven by technological advancements and global trade, which have increased demand for cognitive skills and reduced demand for routine manual tasks. The implications are significant: wage polarization has intensified, with high-skill workers seeing wage growth of 20% over the past two decades, while low-skill workers experienced stagnation. Policymakers must address these disparities by investing in education and retraining programs to equip the workforce for future demands. As the economy evolves, understanding these trends is crucial for developing strategies that ensure inclusive growth and mitigate the risks of economic inequality.

Takeaways by Macro Roundup® AI

  1. Middle-skill jobs fell from 60% to 45% of total employment between 1980 and 2015, while high-skill jobs rose from 25% to 35%.
  2. Wage polarization intensified as high-skill workers saw 20% wage growth over the past two decades while low-skill workers' wages stagnated.
  3. Technological advancement and global trade increased demand for cognitive skills and reduced demand for routine manual tasks, prompting a call for policymakers to invest in education and retraining programs.

, Autor's slidshow. Will read paper when it's released

David Autor, "Work of the Past, Work of the Future," Richard Ely Lecture AEA Meeting, January 4, 2019, https://economics.mit.edu/files/16560