Macro Roundup

Pethokoukis on risks of redistribution, “…Maybe it’s worth reviewing, say, newsfrom the St. Louis Fed where “the evidence suggests that both innovation and venture capital investment increased significantly after the Tax Cuts and Jobs Act.” …One more thing: That bit from the New York Times about “experts have an imperfect understanding of what drives innovation” caught in my brain. Where had I read something similar? Then it hit me. Check out this from “Taxation and innovation in the 20th century” by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva: “Understanding how taxation influences innovation is of central importance to create investment incentives for R&D, yet our knowledge remains limited due to a lack of data, especially covering a long period of time.”…”

James Pethokoukis, "Here’s just how big a risk Elizabeth Warren and The New York Times want America to take,"American Enterprise Institute, November 8, 2019, https://www.aei.org/economics/heres-just-how-big-a-risk-elizabeth-warren-and-the-new-york-times-want-america-to-take/

Here’s just how big a risk Elizabeth Warren and The New York Times want America to take

The New York Times editorial board is truly, madly, deeply confident that if the United States taxes rich people and corporations in a way no other advanced economy does, all will be well. Keep calm and carry on, Silicon Valley! Although conceding in a new editorial that “experts have an imperfect understanding of what drives innovation,” Team NYT goes on to trippingly conclude that “there is little evidence to justify … concern that tax increases of the magnitude proposed by Ms. Warren and other candidates for the Democratic presidential nomination would meaningfully discourage innovation, investment or economic growth.”

Or not. Maybe it’s worth reviewing, say, news from the St. Louis Fed where “the evidence suggests that both innovation and venture capital investment increased significantly after the Tax Cuts and Jobs Act.”

But let’s think broadly for a moment about the novel and risky experiment being proposed by the “broken capitalism” crowd. The World Economic Forum’s new global competitiveness report ranks the US economy as the most competitive big economy in the world, calling it an “innovation powerhouse.” Likewise, no other big economy generates as many super-entrepreneurs or high-impact startups. Jeff Bezos, the Google Guys, Mark Zuckerberg, and Elon Musk aren’t superrich because their parents were billionaires or they were cronies of top politicians. They built companies that consumers and customers greatly value, with their wealth — as massive as it is — reflecting only a tiny portion of that value creation.

Now here comes the Warren plan. First, tax the wealthy in a way and at levels that most other advanced economies have abandoned. (Only four of the 15 European countries that tried even a tiny wealth tax in recent years have stuck with it. And, by the way, the much-praised egalitarian nations of Scandinavia have as many billionaires, relatively, as the US does)

Second, tax corporations at levels all other advanced economies reject. (Rich countries have top corporate rates only slightly higher than the US rate, with Scandinavia about the same.)

Finally, characterize the entire economy as “rigged” and thus all successful people and companies as pretty much corrupt flim-flammers. (When Europeans wonder where their Googles, Amazons, and Apples are, the issue of a corrosive anti-success attitude is frequently mentioned). But what big lesson does Warren take from Europe? That there need to be worker representatives on corporate boards, like in Germany.

One more thing: That bit from the New York Times about “experts have an imperfect understanding of what drives innovation” caught in my brain. Where had I read something similar? Then it hit me. Check out this from “Taxation and innovation in the 20th century” by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva: “Understanding how taxation influences innovation is of central importance to create investment incentives for R&D, yet our knowledge remains limited due to a lack of data, especially covering a long period of time.”

Well, the NYT got it right — but only partly. The researchers then conclude as follows in a column based on their work (italics by me): “This column uses newly constructed datasets from the 20th century to examine the effects of both personal and corporate income taxation on inventors, as well as on firms that do R&D. It finds consistently negative effects of high taxes on innovation over time as well as on individual inventors and firms.”

Look, the US needs to become even more innovative and productive. At least, that’s if it wants to grow anywhere near as fast in the future as it has in the past. A novel experiment in heavy taxation of risk taking and investment seems misguided at best.

paper finds that in the mid 1990's the relationship btw an industry’s q and its funding rate changed. prior to 1996 the "high-funded" industries generally had a higher q than the "low-funded" industries after 1996 that relationship inverted, "high-funded" industries had a lower q then "low-funded" industries.

"....Assuming that a proxy for an industry’s Tobin’s q measures the industry’s growth opportunities, we find that, until the middle of the 1990s, the industries with the highest funding rates were industries with better growth opportunities relative to the lowest funding rate industries, as expected for functionally efficient capital markets. After the middle of the 1990s, capital no longer flows more to the industries with the best growth opportunities. From the middle of the 1990s until 2014, industries with the lowest funding rates have better growth opportunities than the industries with the highest funding rates. We show that this change is entirely due to high q firms that invest less after the middle of the 1990s and use the resulting excess cash flow to repurchase shares. Without these firms, there is a positive correlation between an industry’s funding rate and its growth opportunities throughout the sample period rather than only before the middle of the 1990s.We reach these conclusions using Tobin’s q as a measure of industry growth opportunities, which is defined as the ratio of the market value of the assets of the industry divided by their book value. As we rely on the use of medians and non-parametric tests, however, our conclusions are less sensitive to Tobin’s q mismeasurement than typical parametric approaches. Nevertheless, we confirm that our conclusions are robust using Tobin’s q estimates that account for intangibles and are not an artifact of measurement error in Tobin’s q......The median q of the industries in the top funding rate quintile is 1.33. This median q is not significantly different from the median q of 1.29 for the industries in the bottom funding rate quintile. We expect the greater inflow of resources to be associated with higher capital expenditures and higher asset growth for the most funded industries in comparison to the least funded industries. We find that this is the case. The differences in capital expenditures and asset growth between the two quintiles of industries are large. For capital expenditures, the median ratio of capital expenditures to assets is 66% higher for the most highly funded industries compared to the least funded industries. Asset growth of the most highly funded industries is more than three times the asset growth of the least funded industries......Given the change in regime that appears to take place in the middle of the 1990s, we split our sample into two sub-periods. The first sub-period is from 1971 to the end of 1996 and the second from the end of 1996 to 2014. With this split, we find that in the first sub-period the allocation of capital is exactly what one would expect from the efficient capital allocation hypothesis. During this sub-period, the median Tobin’s q of the industries that are most highly funded is 17% higher than the Tobin’s q of the least funded industries (1.30 versus 1.11) and the difference is significant at the 1% level. A significant q difference emerges between the two groups of industries three years before the year when these industries are classified as most-funded and least-funded. The q difference disappears in year 2 after the selection year. Consequently, the evidence for q is also supportive of the convergence hypothesis before the end of 1996 After 1996, the pattern is opposite. The median Tobin’s q of the industries that are most- funded is 15% lower than the Tobin’s q of the least funded industries (1.37 versus 1.58). The difference is significant at the 5% level and is extremely persistent as it is significant for five years after industries are assigned to the funding rate quintiles. Further, the difference five years after assignment is greater than in the year of assignment, which directly contradicts the convergence hypothesis.....In summary, the relation between an industry’s q and its funding rate changes drastically around the middle of the 1990s. In the 25 sample years before 1996, the high-funded industries (top funding rate quintile) tend to have a higher q than the low-funded industries (bottom funding rate quintile). Further, there is a positive correlation between industry q and the funding rate across all sample industries. After 1996, the opposite occurs: the high-funded industries have a lower q than the low-funded industries and the cross-industry correlation between industry q and the industry funding rate is negative.....With functionally efficient capital markets, we expect capital to flow more to the industries with the best growth opportunities. As a result, these industries should invest more and see their assets grow more relative to industries with the worst growth opportunities. We find that industries that receive more funds have a higher industry Tobin’s q until the mid-1990s, but not since then. Since industries with a higher funding rate grow more, there is a negative correlation not only between an industry’s funding rate and industry q but also between capital expenditures and industry q since the mid-1990s. We show that capital no longer flows more to the industries with the best growth opportunities because, since the middle of the 1990s, firms in high q industries increasingly repurchase shares rather than raise more funding from the capital markets...."

Dong Lee, Hyun-Han Shin and René Stulz, "Why does capital no longer flow more to the industries with the best growth opportunities?," Ohio State University, December 2016, https://papers.ssrn.com/sol3/papers.cfm

Ezekiel Dixon-Roman, Howard Everson and John McArdle, “Race, Poverty and SAT Scores: Modeling the Influences of Family Income on Black and White High School Students’ SAT Performance,” University of Pennsylvania, January 2013, https://www.researchgate.net/publication/280232788_Race_Poverty_and_SAT_Scores_Modeling_the_Influences_of_Family_Income_on_Black_and_White_High_School_Students'_SAT_Performance

http://theunsilencedscience.blogspot.com/2013/10/black-suits-gowns-skin-sat-scores-by.html

That paper was published in the Columbia University teacher's college press by professors from UPenn, CUNY and USC. They looked at 781,437 college-bound, black and white HS students who took the SAT in 2003. They found that "the effects of family income on SAT scores, though relatively modest in contrasts to high school achievement, are substantial, non-linear, and nearly twice as large for Black students." The students answered a lengthy questionnaire about their HS courses, class rank, parental education, family income and race/ethnicity.

from page 15 in the pdf, a white test taker whose family makes ~$20K scores as well as a black test taker from a family of ~$100K.

Carrie Note:That guy's source on the 1995 data was from here:http://www.lagriffedulion.f2s.com/testing.htmHowever, this original link you sent from "The Unsilenced Science" cites this paper (attached), Ezekiel Dixon-Roman, Howard Everson, & John McArdle (2013). Race, Poverty and SAT Scores: Modeling the Influences of Family Income on Black and White High School Students’ SAT Performance Teachers College Record, 115 (4), 1-33

Editorial Board, "The Tax Increases to Come," November 12, 2019, Wall Street Journal, https://www.wsj.com/articles/the-tax-increases-to-come-11573603018

The Tax Increases to Come

The Democratic candidates for President are promising a smorgasbord of new taxes, but why wait until 2021? Last week Maryland Senator Chris Van Hollen and Virginia Congressman Don Beyer unveiled the Millionaires Surtax Act, a plan to soak the top 0.2%.

The bill would put an extra 10% tax on individual income above $1 million, or $2 million for married couples. This surtax would apply regardless of the income’s source—whether from long-term capital gains, currently taxed at a top rate of 20%, or wages, taxed at rates up to 37%. The legislation’s backers say it would raise $635 billion over a decade, citing an estimate by the left-leaning Tax Policy Center.

What to Look For as the House Begins Public Impeachment Hearings

Messrs. Van Hollen and Beyer would effectively lift the top tax rate on income to 47%, plus there’s the 3.8% ObamaCare surtax on investment income. Tax rates haven’t been that high in decades. Before Ronald Reagan’s big tax reform in 1986, the top rate was 50%. Since then it hasn’t broken 40%.

The loopholes were also bigger and more numerous then. Reagan’s 1986 law, for example, phased out the deduction for interest on credit cards and car loans. President Trump’s 2017 tax reform narrowed the interest deduction for homeowners, so only the first $750,000 of a mortgage is now eligible.

That 2017 law limited the amount of state and local taxes that can be deducted on a federal return. It used to be unlimited, but now the cap is $10,000. There are plenty of other examples, but the basic point is that the tax base has broadened. This is desirable economically as long as the trade-off is lower rates. If Democrats now try to raise income-tax rates back to their pre-Reagan heights, special interests will soon be busy carving out new loopholes, especially for the affluent.

In the 1950s, the top income-tax rate hit 92%, which applied to earnings above roughly $2 million, adjusted for inflation. Still, the wealthiest 1% of filers paid an effective income-tax rate of only 16.9%, according to an analysis by the Tax Foundation. By 2016 the top rate was 39.6%, but the richest percentile had an effective rate of 26.9%. Meanwhile, the overall share of income taxes paid by the top 1% has increased, from 26% in 1986 to 37% in 2016.

Mr. Beyer says the Millionaires Surtax Act would “restore fairness to the tax code.” Ohio Senator Sherrod Brown, another sponsor, adds that the new surtax would ensure “the wealthy are paying their fair share.” Rest assured, Mr. Van Hollen says, this bill isn’t “in conflict” with other desired tax increases.

Democrats these days are also proposing to raise the regular income-tax rate, the corporate-tax rate, the capital-gains-tax rate, the dividend-tax rate, the death-tax and payroll-tax rates, while creating a new wealth tax, a new financial-transactions tax, a new carbon tax and a new pharmaceutical tax, even as they would repeal 100% business expensing and the 20% income exclusion for so-called pass-through firms. We’ve probably missed a few others.

As usual, the question Democrats won’t answer: Should the top 1% pay half of all income taxes? Two-thirds? Three-fourths? Where does their “fair share” end? If Democrats sweep the 2020 election, we are sure to find out.

“…A socialist society also will have its powerful elite, but this elite will comprise those whose control of the nation’s wealth derives solely from their political success, totally devoid of any intrinsic, productive social value. That is, they will control the wealth to which they have not contributed…..”

Stanley Spatz, "Income Quintiles Don’t Tell the Whole Story,"Wall Street Journal, November 12, 2019, https://www.wsj.com/articles/income-quintiles-dont-tell-the-whole-story-11573580927

Regarding Phil Gramm and John F. Early’s “The Truth About Income Inequality” (op-ed, Nov. 4): The socialist promise of income equality is understandably appealing but is a canard. Every society, regardless of its utopian goals, will have inequality: It will have the powerful and it will have the weak. In our capitalist system, the wealthy have more power than the poor. Occasionally this wealth is due to illegal enterprise or simple good fortune, but mostly it is due to creativity, an entrepreneurial spirit or hard work, and usually to a combination of all three. Social power, therefore, is essentially a meritocracy: If there is “inequality,” it is generally the result of efficiently providing the public with needed goods and services. Hence, the “privileged” are those who actually produce the wealth.

A socialist society also will have its powerful elite, but this elite will comprise those whose control of the nation’s wealth derives solely from their political success, totally devoid of any intrinsic, productive social value. That is, they will control the wealth to which they have not contributed.

Stanley Spatz, M.D.

Peter J. Klenow, Huiyu Li, and Theodore Naff, "Is Rising Concentration Hampering Productivity Growth?," Federal Reserve Bank of San Francisco, November 4, 2019, https://www.frbsf.org/economic-research/publications/economic-letter/2019/november/is-rising-concentration-hampering-productivity-growth/

NYT reports the the FRBNY NY/PA minimum wage study we looked at. good Neumark quotes, "...."David Neumark, an economist at the University of California, Irvine, warns that results in New York and other high-wage states would not necessarily map to other regions.“You start talking about Southern, low-wage states, where low-wage workers aren’t evenly distributed across industries” and “you have fewer and fewer avenues of adjustment,”he said...."

"....New York’s southern border, where Meeder’s sits, is one useful case. The state has been gradually lifting its minimum wage since late 2013, so that it now stands at $11.10 and is set to hit $12.50 by 2020. Fast-food workers earn even more, currently at least $12.75. Pennsylvania, immediately to the south, has stuck by the $7.25 federal minimum. That discrepancy has created a sort of natural experiment. Researchers at the Federal Reserve Bank of New York recently found that wages had increased sharply for leisure and hospitality workers in New York’s border counties while employment growth continued unabated. Their analysis immediately sparked debate. Right-leaning research groups took issue with which counties were analyzed — one was close to New York City, and two saw big businesses open, spurring job growth. They also questioned which worker categories were examined. An analysis of the data by The New York Times, paired with on-the-ground reporting, generally supports the Fed’s findings. Wages shot up in New York State’s southern counties, especially for low-earning workers, compared with 2012 — just before wage floor increases were announced. While the adjustment to higher labor costs has not been painless, the pay increases did not consistently come alongside weaker hiring relative to Pennsylvania’s trend...."

Jacques Bughin, Eckart Windhagen, Sven Smit, Jan Mischke, Pal Erik Sjatil and Bernhard Gürich, "Innovation in Europe: Changing the game to regain a competitive edge," McKinsey Global Institute, October 2019, https://www.mckinsey.com/featured-insights/innovation-and-growth/reviving-innovation-in-europe

"...While Europe has the largest public R&D spend, itsprivate investment in research and development amounts to just 19 percent of the global total, behind China at 24 percent and the United States at 28 percent. The continent invests 1.7 percentage points of GDP less than the United States in key intangible assets like software, databases, and intellectual property. Its R&D share in software and computer services is only about 8 percent of the global total. Europe especially lags in investment in frontier technologies; 90 percent of investment in synthetic biology has been made in the United States, for example, while the European continent generates only half as many patents per capita as the United States in digital, quantum computing, and big data.....In talent, too, Europe has long been a research powerhouse. Its research community is larger, but also more diffused, than that in the United States or in China. The tech workforce employed by startups is growing; it expanded by about 4 percent in 2018. The number of European software developers, a key resource for many innovative technologies, has grown at a rate of 4 to 5 percent in the past two years, culminating in a total of 5.7 million professionals today, well ahead of the United States, with 4.4 million professional software developers....The stakes for those falling behind are rising as the global economy enters a “superstar” era in which scale can become a differentiating factor and winners reap disproportionate gains. This affects innovation: superstar firms show more than double the R&D intensity of median firms, and about two-thirds of global R&D investment is concentrated in just 250 companies. Yet European firms are finding it difficult to achieve this scale. The European share of large global companies in the top decile for economic profit dropped by about half between 1995 and 2016 to only 16 percent, while it remained constant for the United States and Canada and rose sharply for Asian firms. Europe notably lacks global digital platforms..... European companies are less mature in their state of diffusion of digital technologies and in their use of these technologies for innovation, namely new services, processes, or business models. Research confirms that diffusion of technologies to firms that are technological laggards typically happens only after these technologies are adapted to country-specific circumstances by the most productive firms within each country..... Europe has started falling back in its share of superstars. Over the past 20 years, Europe’s share of superstars globally dropped by about 50 percent, while it remained constant for the United States and Canada and increased significantly for the Asia-Pacific region (Exhibit 6).42 R&D also is becoming increasingly concentrated, and Europe is losing share, particularly in digital sectors. Only 250 companies generate close to two-thirds of global business R&D investment. In this group, while European automotive players dominate, European companies’ R&D spending by software and computer services firms was only about 8 percent of the global total, well below 11 percent for Chinese companies and far behind the 77 percent for US-based companies in 2018 (Exhibit 7).Furthermore, the trend is negative. Over the past five years, the global share of European companies’ total R&D spending has declined by more than two percentage points, while the share of US companies climbed by more than two percentage points and the share of Chinese companies by six percentage points.45 The share of European companies among those newly joining the ranks of the 2,500 largest R&D investors decreased to about 12 percent, only about half the share of Chinese firms and one-third the share of US companies....."

Philippon's name doesn't show up. Guess they didn't read his book and revise their findings.

Paper finds that their R&D is concentrated in automotive sector. for example Europe makes up 53% of total R&D spend in automotive sector (in terms of R&D spend of the top 250 firms globally). also finds slower diffusion in Europe versus the US, share of superstar firms declining, share of global superstars has dropped by 50% since 1999.

new McKinsey on innovation in Europe (heavily reliant on their Superstars research that we cited in OUP chapter) good factoids for use against Philippon.