Macro Roundup

Robert Rector and Vijay Menon, “Understanding The Hidden $1.1 Trillion Welfare System And How To Reform It,” The Heritage Foundation, April 5, 2018, https://www.heritage.org/sites/default/files/2018-04/BG3294.pdf

“…Consider a single mother who has two school-age children and has worked full-time for 52 weeks in the year at the federal minimum wage of $7.25 per hour.27 (The overwhelming majority of single parents actually work at a higher wage rate.)This mother would receive $13,853 in annual post-tax earnings. Based on earnings alone, her income is well below the official FY 2015 poverty income threshold of $19,096 for a family of three. But this mother would also be eligible for basic means-tested benefits including Earned Income Tax Credit, Additional Child Tax Credit, food stamp, school lunch, and (in some cases) school breakfast benefits. As Chart 2 shows, in addition to $13,853 in post-tax earnings, the mother would receive $5,548 in cash benefits through the EITC and $1,800 in cash benefits through the ACTC. The family would also get $3,974 in food stamp benefits and $1,269 in school lunch and school breakfast benefits. The combined value of earnings, cash welfare, and food benefits would come to $26,444:…”

Hilary Hoynes and Diane Whitmore Schanzebach, “Safety Net Investments In Children,” Brookings Papers On Economic Activity, March 2018, https://www.brookings.edu/wp-content/uploads/2018/03/2_hoynesschanz1.pdf

Robert Frank, Success And Luck: Good Fortune And The Myth Of Meritocracy, Princeton University Press, 2016, https://press.princeton.edu/books/hardcover/9780691167404/success-and-luck

Edward Conard, “Even Liberal Economist Agree Investors Must Create $5 For Others To Put A $1 In Their Pocket,” www.EdwardConard.com, https://www.staging4.edwardconard.com/2019/01/16/the-upside-of-inequality-pp-76-79/ EVEN LIBERAL ECONOMISTS AGREE INVESTORS MUST CREATE $5 FOR OTHERS TO PUT A $1 IN THEIR POCKET

William D. Nordhaus, “Schumpeterian Profits and the Alchemist Fallacy,” Yale Economic Applications and Policy Discussion Paper No. 6, April 2, 2005, http://papers.ssrn.com/sol3/papers.cfm.
Ibid.
Edward Conard, Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong(New York: Portfolio, 2012), 255.
Adam Davidson, “The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy,” New York Times Magazine, May 1, 2012, http://www.nytimes.com/2012/05/06/magazine/romneys-former-bain-partner-makes-a-case-for-inequality.html.
Ibid.
Ibid.
Ibid.

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At Nordhaus’s 20:1 ratio, the value of investment to noninvestors obviously overwhelms the value of redistribution for all but the poorest households—households that only participate indirectly in the economy through redistribution.

The New York Timeserroneously reported (although perhaps intentionally so) that a 20-times multiplier was “crucial” to my argument.The reporter admitted that “the idea that society benefits when investors compete successfully is pretty widely accepted.”The article used Dean Baker, “a prominent progressive economist with the Center for Economic and Policy Research,”as expert testimony to dispute the 20:1 multiplier. The article reported: “Baker estimates the ratio is 5 to 1, meaning that for every dollar an investor earns, the public receives the equivalent of $5 of value.”Ironically, that’s essentially the value I assumed in my calculations to avoid disputes with liberal economists like Dean Baker!...

In my previous book, I argued that redistribution hurts the middle and working classes because they forgo more value from lost investment than they reclaim from redistributed income. While I argued that investment likely produces 20 times more value for consumers and workers than is captured by investors—in line with Nordhaus’s estimates—my analysis was based on consumers and workers capturing only 3.8 to 5.7 times more value than investors.I reasoned that no one would dispute estimates that conservative.

Because the benefits of innovation garnered by the public are far greater than the payoff captured by successful innovators, it is surprising how eager the advocates of redistribution are to maximize taxes collected from innovators rather than to maximize the pace of innovation. They focus on the tail instead of the dog. Tax policy that seeks to maximize tax revenues in the short run is horribly shortsighted. A more logical policy seeks to maximize the pace of innovation and the benefits captured by the middle and working classes in the long run.

Nordhaus cautions: “The low appropriability of innovation should caution investors about committing the alchemist fallacy.... Some believed that such a virtual substance had been found in the electronic world. But the laws of economics teach us that were anyone to find such a miraculous substance, its value would quickly fall.... In retrospect, the laws of economics look like a safer bet than the lure of alchemy.”

In truth, investors profit relatively little from their creations. A study by the Yale economist William Nordhaus concludes, “Only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.” Nordhaus estimates that innovative producers capture less than 5 percent of the value their inventions create for society.And those are the innovators who succeed!

William Nordhaus, “Schumpeterian Profits And The Alchemist Fallacy,” Yale Economic Applications And Policy Discussion Paper, October 5, 2005, https://papers.ssrn.com/sol3/papers.cfm

“…the non-elderly middle class paid about $13,000 in taxes in 2006, including payroll taxes paid by individuals and their employers and allocated deficit spending, for the $14,000 of government services they received (see Figure 10-1, “Federal Government Expenditures and Taxes by Household Type”). They received nearly a $1,000-a-year stipend to supplement their nearly $60,000 a year of household earnings, plus they expect to receive $28,000 a year of retirement benefits in the future, for which, in truth, they contributed nothing.Nor did they pay any assistance to the poor or the elderly. In 2006 non-elderly working-class households earning between the twentieth and fortieth percentiles of income paid about $7,000 a year in taxes, including payroll taxes, for $15,000 a year of government services. They received an $8,000 stipend on their approximately $36,000 of household income, not including their expected retirement benefits. In fact, they paid about the same amount of taxes as they received in direct government benefits…”

Edward Conard, “Doesn’t Taxing The Middle Class Less Than The Full Cost Of The Government Services They Consume Weaken Democracy?”www.EdwardConard.com, https://www.staging4.edwardconard.com/2019/01/16/the-upside-of-inequality-pp-260-264/
DOESN’T TAXING THE MIDDLE CLASS LESS THAN THE FULL COST OF THE GOVERNMENT SERVICES THEY CONSUME WEAKEN DEMOCRACY?

“The Distribution of Federal Spending and Taxes in 2006,” Congressional Budget Office, November 7, 2013, https://www.cbo.gov/publication/44698.
Ibid.
Ibid.

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And is it any wonder the moral fabric frays when we look to our elders and find that they take more than everyone else, no matter how high their income, when this money could be used to help the poor, lower the deficit, or fund research and development that improves the future? Doesn’t it fray even more when political leaders, especially advocates of redistribution, refuse to demand any entitlement reforms whatsoever? Don’t most people throw up their hands and justify looking after only themselves?

When political leaders insist that the handful of successful entrepreneurs—who took the risks and made the sacrifices necessary to produce innovation in an economy that would otherwise grow more slowly, and who serve their fellow man by serving customers—are nothing more than cheaters who succeeded at the expense of the middle class, moral obligations fray further. Advocates of redistribution insist that these successful leaders refuse to pay their “fair share” of taxes, despite their financing almost all of the aid to the poor and elderly. Rather than uniting society’s leaders and followers and calling for everyone to fulfill their civic obligations, advocates of redistribution claim middle- and working-class taxpayers deserve to pay less—when they are already paying less than zero.

Perhaps we have already seen what happens when we no longer ask people to feel responsible for setting aside some portion of their income for others (namely, for the poor and the elderly) or even to save for their own retirement, because they assume others will provide it for them. The moral fabric seems to fray when people no longer have fundamental responsibilities for others.

In 2006 non-elderly working-class households earning between the twentieth and fortieth percentiles of income paid about $7,000 a year in taxes, including payroll taxes, for $15,000 a year of government services. They received an $8,000 stipend on their approximately $36,000 of household income, not including their expected retirement benefits. In fact, they paid about the same amount of taxes as they received in direct government benefits….

From this perspective, the non-elderly middle class paid about $13,000 in taxes in 2006, including payroll taxes paid by individuals and their employers and allocated deficit spending, for the $14,000 of government services they received (see Figure 10-1, “Federal Government Expenditures and Taxes by Household Type”). They received nearly a $1,000-a-year stipend to supplement their nearly $60,000 a year of household earnings, plus they expect to receive $28,000 a year of retirement benefits in the future, for which, in truth, they contributed nothing.Nor did they pay any assistance to the poor or the elderly.

For example, military expenditures—60 percent of shared government services—can be allocated to households based on their income.By that, I mean the true measure of their income—not just their earned income, but their earned income plus the value of government services and transfers less taxes. That allocation scheme presumes rich families have more to protect and lowers everyone else’s allocation….

Interestingly, the Congressional Budget Office (CBO) has conducted the complex exercise of allocating the cost of federal government services directly consumed by the elderly—chiefly Social Security and Medicare—and then separately, for each of the income quintiles of nonelderly workers.With a little more elbow grease, one can also allocate the indirect government services that everyone shares.

The true measure of taxation is the amount one pays over and above the cost of the government services they consume—the dollars redistributed from one person’s pocket to another’s. We don’t consider it taxation when we buy food. We should think about taxation for government services in the same way. Taxes are what we pay over and above the cost of the government services we receive.

Evidence from France documenting labor market polarization btw large and small cities; study finds a tight link btw large cities becoming even more skilled relative to lower skilled smaller cities, which have become less skilled. They don’t address housing costs.

“….We examine….labor market polarization and the great divergence using detailed data over the period 1994-2015 for a sample of 117 French cities. The data employed includes inter alia population, skills, employment by occupation, and measures of routinizability and offshorability of jobs. The data validate baseline predictions from the theory, including a log-supermodular distribution of skills and differential patterns of employment, whereby at baseline larger cities have less employment in middle-paid jobs and relatively more employment in high paid jobs. Consistent with prior work,we find labor market polarization in the aggregate for France in the study period. We go beyond this to show that labor market polarization is very close to ubiquitous at the local level, with 115 of 117 cities sharing this feature. In spite of this, we also show that these patterns differ importantly in cities of different sizes. Large cities have a sharper loss of middle-paid jobs. Yet in the large cities these jobs are replaced two-to-one with high paid jobs, and the reverse pattern in small cities.All of these observations are consistent with our theoretical framework. In the prior work on labor market polarization, the primary spatial concept of concern was exposure. The literature showed that the regions most exposed to middle-paid routinizable and offshorable jobs at baseline were also the regions that had the sharpest decline in these jobs in the periods of study. While very insightful, these studies also have limitations. First, these are only a subset of the lost middle-paid jobs, and so the empirics are unclear to what extent this exposure is also indicative of the loss of other middle-paid jobs or of the entire class of middle-paid jobs. This would require thinking about dimensions of heterogeneity within the class of middle-paid jobs that the prior frameworks are not designed to address, but which is central to what we do. Our data confirms the prior result that cities with a large initial exposure to the most routinizable and offshorable jobs indeed have the sharpest contraction of these jobs in the study period. Importantly, though, we find that the loss of other middle-paid jobs and indeed of middle-paid jobs taken as a whole have the reverse pattern that might be expected from this. It is the large cities that have the greatest loss of the middle-paid jobs, even though the initial exposure to these jobs is smaller in large cities. Moreover, consistent with our framework, the primary difference between large and small cities occurs in the upper tail of middle-paid jobs, which decline sharply in large cities even as high skill jobs there expand greatly. In sum, we find that the period of study identifies two Frances. In the France of large cities, there is a dramatic change, as there is a sharp contraction of middle-paid jobs, particularly at the top end of these. However in the France of large cities, these middle-paid jobs are largely replaced by high-paid jobs, with a more modest expansion of low-paid jobs. Still there is very sharp polarization within these cities. In the France of small cities, there is a strong, yet more moderated, loss of middle-paid jobs. Some high paid jobs are gained, but the lost middle-paid jobs are primarily replaced by low paid jobs. Polarization of jobs in the aggregate and within cities is accompanied by a great divergence between the Frances of large and small cities. …”