Macro Roundup

Great quote from Heckman, "... The current research in the field is shoddy. It has gained traction because it appeals to the negative image of American society held by leading opinion makers like the New York Times and the Atlantic. In truth, the evidence based on the IRS data is deeply flawed and has been incorrectly analyzed. Take “The Opportunity Atlas” promoted by the New York Times. It claims that “zip code is destiny.” Careful statistical analysis of the data shows otherwise. The same can be said of the academics who write about the growth of the Top 1%. Careful studies show much less growth in disparity than what is picked up in the popular press and by populist politicians. A new “wisdom” has emerged: large samples more than compensate for faulty or missing data. The wisdom of this crowd is that sample size trumps careful data analysis....."
Gonzalo Schwarz, "Nobel-Prize Winning Economist Dr. James Heckman on Social Mobility, the American Dream, and how COVID-19 Could Affect Inequality, Medium, April 14, 2020, https://medium.com/@ArchbridgeInst/nobel-prize-winning-economist-dr-5550da1df5c3

Nobel-Prize Winning Economist Dr. James Heckman on Social Mobility, the American Dream, and how COVID-19 Could Affect Inequality

On April 14, 2020 Gonzalo Schwarz, President and CEO of the Archbridge Institute, conducted the following interview with Dr. James J. Heckman. Dr. Heckman is the Henry Schultz Distinguished Service Professor in Economics and the Director of the Center for the Economics of Human Development at the University of Chicago. In 2000, Heckman shared the Nobel Prize in Economics for his work on the microeconometrics of diversity and heterogeneity and for establishing a sound causal basis for public policy evaluation. For more on the work of Dr. Heckman, click here.

Gonzalo Schwarz: Many commentators have said that it is not possible to achieve the American Dream any more in the United States. Do you think the American Dream is alive and well?

Dr. James Heckman: Ask any immigrant. They are grateful for the chances that America has given them. Many came with nothing. They live in decent neighborhoods and their families have better lives than they could have before coming here. Their children go to college and integrate into American society. The progress of African Americans over the past century is staggering. Many have shaken off the legacies of poverty and discrimination. Those who deny that the American Dream is achievable ignore the myriad success stories and the mindset for personal growth that America offers.

S: When people talk about the American Dream they do so in the context of the current academic and policy discussion on income mobility and inequality. How would you characterize the current research in this field? What are some of the key issues with the literature and public discussions around these issues?

H: The current research in the field is shoddy. It has gained traction because it appeals to the negative image of American society held by leading opinion makers like the New York Times and the Atlantic. In truth, the evidence based on the IRS data is deeply flawed and has been incorrectly analyzed. Take “The Opportunity Atlas” promoted by the New York Times. It claims that “zip code is destiny.” Careful statistical analysis of the data shows otherwise. The same can be said of the academics who write about the growth of the Top 1%. Careful studies show much less growth in disparity than what is picked up in the popular press and by populist politicians. A new “wisdom” has emerged: large samples more than compensate for faulty or missing data. The wisdom of this crowd is that sample size trumps careful data analysis.

S: Without going into detail, what do you think are the main barriers to income or social mobility? (Could be micro level such as agency and family structure or on a bigger scale in terms of labor markets, entrepreneurship, etc.)

H: The main barriers to developing effective policies for income and social mobility is fear of honest engagement in the changes in the American family and the consequences it has wrought. It is politically incorrect to express the truth and go to the source of problems. Public discourse, such as it is, cannot speak honestly about matters of culture, race, and gender. Powerful censorship is at play across the entire society.

S: In your research you discuss the key importance of family structure for social mobility. Why do you feel so strongly about this issue?

H: The family is the source of life and growth. Families build values, encourage (or discourage) their children in school and out. Families — far more than schools — create or inhibit life opportunities. A huge body of evidence shows the powerful role of families in shaping the lives of their children. Dysfunctional families produce dysfunctional children. Schools can only partially compensate for the damage done to the children by dysfunctional families.

S: Your work on early childhood education is constantly cited as a justification for universal preschool education. Is that a policy you have recommended or what is your main focus and potential solution when you promote the importance of early childhood education?

H: I have never supported universal pre-school. The benefits of public preschool programs are the greatest for the most disadvantaged children. More advantaged children generally have encouraging early family lives. The “intervention” that a loving, resourceful family gives to its children has huge benefits that, unfortunately, have never been measured well. Public preschool programs can potentially compensate for the home environments of disadvantaged children. No public preschool program can provide the environments and the parental love and care of a functioning family and the lifetime benefits that ensue.

S: Do you have any thoughts overall on how this current crisis could impact social mobility and inequality?

H: Inequality in health and earnings will be exacerbated by it. Poverty and disadvantage foster disease. Inequality in access to health care fosters inequality in health and poor health inhibits the ability to contribute to society. With so many people now out of work — and out of health benefits — short-run inequality generated by poor health will increase in addition to the inequality created by the loss of jobs. We know this is true because those in poor health before COVID-19 struck are the primary victims of the new pandemic.

S: In your work a key component to childhood development and human capital is parental engagement. Because of the school closures and stay at home mandates in many states, children and their parents are staying at home which should increase the level of parental engagement. Do you think that this will be helpful for childhood development as it pertains to that specific issue or because of the heterogeneity of the quality of parental engagement and capacity of some parents to develop quality engagement, the end result could be more inequality as some kids will have a higher quality of parental engagement than others?

H: To those who have more will be given. For stressed families where the single parent is still working, the early childhood environment will likely worsen.

“…Earlier this month, the Joint Committee on Taxation, a nonpartisan congressional body, found that the two other breaks — those that allow people to deduct only-on-paper losses from their tax bills — would go largely to people making at least $1 million a year…. As part of the economic rescue package that became law last month, the federal government is giving away $174 billion in temporary tax breaks overwhelmingly to rich individuals and large companies, according to interviews and government estimates…..”

Jesse Drucker, "The Tax-Break Bonanza Inside the Economic Rescue Package,"New York Times, April 24, 2020, https://www.nytimes.com/2020/04/24/business/tax-breaks-wealthy-virus.html

As the federal government dispenses trillions of dollars to save the economy, small businesses and out-of-work individuals are jostling to grab small slices of aid before the funds run out.

But another group is in no danger of missing out: wealthy individuals and big companies that are poised for tax windfalls.

As part of the economic rescue package that became law last month, the federal government is giving away $174 billion in temporary tax breaks overwhelmingly to rich individuals and large companies, according to interviews and government estimates.

Some of the breaks apply to taxes have long been in the cross hairs of corporate lobbyists. They undo limitations that were imposed to rein in the giveaways embedded in a $1.5 trillion tax-cut package enacted in 2017. None specifically target businesses or individuals harmed by the coronavirus.

One provision tucked into the federal economic-rescue law increases the amount of deductions companies are permitted to take on the interest they pay on large quantities of debt. Only companies with at least $25 million in annual receipts can qualify for that break.

Another change lets people deduct even more of their businesses’ losses from any winnings they reaped in the stock market, sharply reducing what they owe in capital gains taxes. Only households earning at least $500,000 a year — the top 1 percent of American taxpayers — are eligible.

And yet another provision in last month’s rescue package allows companies to deduct losses in one year against profits that they earned years earlier. The tax break most likely won’t put any extra cash directly into the hands of companies hit by the current crisis for at least a year.

The bottom line is that, barely two years after congressional Republicans and President Trump lavished America’s wealthiest families and companies with a series of lucrative tax cuts, those same beneficiaries are now receiving a second helping.

Many of the tax benefits in the stimulus are “just shoveling money to rich people,” said Victor Fleischer, a tax law professor at the University of California, Irvine. While the 2017 tax-cut package was a bonanza for big companies and wealthy individuals, in order to keep the law’s overall costs down it imposed a number of restrictions on who could take advantage of certain tax breaks and how much those taxpayers could reap.

Now, with the 2020 stimulus package, Congress has temporarily repealed a number of those limitations.

“Under the cover of the pandemic, they are undoing the perfectly sensible limitations” that moderated the size of the 2017 tax cuts, said H. David Rosenbloom, a corporate tax lawyer at Caplin & Drysdale and head of the international tax program at New York University’s law school. “And taking into account the giveaways in that act, it’s a joke.”

The new law temporarily undoes a restriction on companies using losses in one year to obtain refunds for previous profitable years. Big companies, including Morgan Stanley, have lobbied on related issues as recently as this year, according to the Center for Responsive Politics.Credit...Jeenah Moon for The New York Times

Senator Charles Grassley, the Iowa Republican who is chairman of the Senate Finance Committee, defended the changes. The stimulus law “threw a much-needed financial lifeline to businesses of all sizes, types and industries to give them the best chance to survive,” he said. He added, “The attempt to paint these bipartisan tax provisions as a boon for particular industries or investors completely misses the mark.”

One of the breaks temporarily rolls back the 2017 restriction on how much debt some companies can deduct from their taxes. That restriction was the subject of lobbying for the last two years by big companies, including Coca-Cola and Hewlett Packard Enterprise, according to federal lobbying records. The National Association of Manufacturers, whose board includes executives from Exxon Mobil, Raytheon, and Caterpillar, has pushed lawmakers for similar changes.

Earlier this month, the Joint Committee on Taxation, a nonpartisan congressional body, found that the two other breaks — those that allow people to deduct only-on-paper losses from their tax bills — would go largely to people making at least $1 million a year.

That analysis came in response to requests by the Democratic lawmakers Representative Lloyd Doggett of Texas and Senator Sheldon Whitehouse of Rhode Island. On Tuesday, Mr. Doggett introduced legislation that would roll back major chunks of the tax breaks. Among other things, it would no longer let people who earn more than $500,000 to immediately deduct all of that year’s business losses from their capital gains.

“Tax giveaways for a wealthy few shouldn’t have come near a coronavirus relief bill,” said Senator Whitehouse, who plans to introduce a Senate version.

The biggest tax break permits wealthy investors in, say, the real estate or energy businesses to use only-on-paper financial losses — such as from writing down, or depreciating, the value of assets — to reduce the taxes they owe on profits from stock market investments.

The provision does not single out real estate. But the industry is well known for generating tax losses from depreciation even in profitable years.

The 2017 tax-cut law limited the ability to use those losses. A married couple could shelter only the first $500,000 of their nonbusiness income — such as capital gains from investments — in the year that the loss was generated. Any leftover losses would be rolled over into future years.

The stimulus undoes those restrictions for this year and, retroactively, for 2018 and 2019 — meaning that wealthy households will be able to shield far more of their capital gains from taxation.

The 2017 law also restricted the ability of companies to use so-called net operating losses — which are losses that companies report on their tax returns, even if they are otherwise profitable — to reduce their tax bills. (Net operating losses can include expenses that are only for tax purposes and that don’t reduce profits reported to shareholders.) No longer could such losses from one year be used to retroactively cancel out profits accumulated in previous years, thus generating tax refunds.

The new law temporarily undoes that restriction, enabling companies to use losses in one year to get refunds for previous profitable years.

Big companies, including Morgan Stanley, have lobbied on issues relating to such tax losses as recently as the first few months of this year, according to records compiled by the Center for Responsive Politics.

Among the problems with this tax break, critics say, is that it isn’t aimed at the companies hit by the coronavirus pandemic. Under the new law, companies that will suffer big losses in 2020 won’t be able to use those losses to obtain refunds until they file their tax returns at least a year from now.

The provision will quickly put cash into a company’s pockets if it had tax losses from 2019 or earlier — well before the pandemic — that can be applied against profits from preceding years.

“There’s no reason to send money in a blanket form to all the companies that have net operating losses,” said Mr. Fleischer. “We have some amazingly successful companies that don’t pay tax and have net operating losses, and there’s no reason to be subsidizing these companies or expect that money will find its way down to the employees.”

The tax breaks for companies that report losses are likely to be especially lucrative because the 2017 tax law created new deductions that could generate large paper losses — for tax purposes only — for otherwise profitable companies in 2018 and 2019. For example, the 2017 law permitted companies to fully write off certain types of investments in the first year, instead of stretching those deductions over several years. That, in turn, meant companies could report profits to their shareholders but losses on their tax returns.

A third break, worth more than $13 billion over a decade, temporarily loosens 2017 restrictions on how much interest big companies can deduct on their tax returns. Private equity firms, which rely on borrowed money to generate big profits, have been urging the Treasury Department to write favorable rules governing the restrictions on how much interest on their debt companies can deduct from taxes.

The private equity industry is poised to benefit from the rescue package. Companies with at least $25 million in annual revenue are now eligible to deduct more interest from their tax bills — a change that will make the private-equity business model even more lucrative. Private equity firms amplify their profits by using borrowed money to finance their investments. Deducting even more of the interest on that debt from their taxes would further boost their profits.

The tax break “allows private equity to swoop in and scoop up struggling businesses,” said Matthew Rappaport, a tax lawyer who specializes in private equity at Falcon Rappaport & Berkman in New York.

David Brooks, "Who Is Driving Inequality? You Are,"New York Times, April 23, 2020, https://www.nytimes.com/2020/04/23/opinion/income-inequality.html

Who is driving inequality in America? You are. I am. We are.

Did you read to your kids before bed when they were young? If you did, you gave them an advantage over kids whose parents were working the evening shift at 7-Eleven. Did you spend extra on tutoring or music lessons? Since 1996, affluent families have spent almost 300 percent more educating their young while everybody else’s spending has been mostly flat.

Did you marry before having kids and raise your kids in a two-parent home? The children of the well educated are now much more likely to grow up in stable families, and those differences in family structure explain 32 percent of the growth of family income inequality since 1979.

If you did these things, you did nothing wrong. You invested in your children’s flourishing as any decent parent would.

But here’s the situation: The information economy rains money on highly trained professionals — doctors, lawyers, corporate managers, engineers and so on.

Daniel Markovits, author of “The Meritocracy Trap,” estimates there are about one million of these workers in America today. They work really hard, are really productive and earn a lot more. In the mid-1960s, profits per partner at elite law firms were less than five times a secretary’s salary. Now, Markovits notes, they are over 40 times.

These professionals invest heavily in their children’s education. By eighth grade, students from affluent families are four grade levels ahead of students from poor families. Seventy-two percent of students at the 150 most competitive colleges come from the richest quarter of families, and only 3 percent come from the poorest.

Inherited inequality is bad enough. But it’s the geographic concentration that is really turning America into a caste society. Affluent people used to be spread around: owning the local bank or factory, sending their kids to the local schools.

Now those of us in the top 20 percent of earners are concentrated in talent-rich zones around New York, D.C., the Bay Area, etc. The already advantaged build rich communities and multiply one another’s advantages even more. It takes a village to raise a Stanford grad.

You don’t have to drive very far outside these top 20 percent communities to find yourself in a different universe. In February I drove from Manhattan Beach, Calif., to Watts in South Central L.A. and Compton, where I spent a few days interviewing residents.

People in Compton and Watts — almost exclusively Latino and black — talked about all the things that have been stripped away from their communities: good schools, public amenities, school choirs, music festivals. Fear was a constant subject of conversation. Most of the people I spoke with had lost a family member to gun violence.

People spoke about intense levels of social distrust; the locals had been betrayed again and again by outsiders and now are very skeptical of people promising to make improvements. They talked about trauma. “There are Compton riots on the inside now,” one resident told me.

I chose to go to Compton and Watts for a specific reason, which offers a way forward. Harvard economist Raj Chetty recently led a study that showed that though these two neighborhoods are demographically similar and only 2.3 miles apart, 44 percent of the black men who grew up in Watts were incarcerated on April 1, 2010, compared with only 6.2 percent of the black men who grew up in families with similar incomes in Central Compton. Similarly, social mobility was much lower in Watts than in Compton.

Why are some neighborhoods, including some in Compton, able to give their kids better chances in life despite so many disadvantages? Chetty points to several factors: better schools, more fathers present in the neighborhoods and more cohesive community organizations.

I found all those things in my reporting in Compton — and something else. Watts is part of Los Angeles. Compton is its own city with its own mayor. I met a lot of great people in Watts, but Compton has more civic infrastructure — community groups and locally controlled government agencies. Compton has a lot of homegrown civic reformers, like Rafer Owens, who is a deputy Los Angeles County sheriff and pastor at a Baptist church. There’s also a mentality: We have faith in our ability to take care of ourselves; only people in the neighborhood really know what’s going on.

Some people who talk about inequality focus on the top 1 percent, and if you want to go after the hedge fund billionaires feel free. But as inequality is actually lived out, it’s the 20/80 gap that is most glaring and most unjust.

But we can reduce the opportunity gap if we follow the lessons of Compton: First, the neighborhood is the unit of change. Social mobility rises village by village. Second, the people in the community have to be in charge. They need resources from outside, but only local control does the trick. Third, spending money on preschool, apprenticeship and other human capital programs really works.

The top 20 percent is not going to stop spending heavily on their kids. We have to give the bottom 80 percent the resources to do the same.