Macro Roundup

Gender differences

Mark Perry 2020 Update: “For every 100 girls…..” Part I,” American Enterprise Institute, October 28, 2020, https://www.aei.org/carpe-diem/2020-update-for-every-100-girls-part-i/

Critique from Krugman of recent American trade policy, it could have worked in theory but there was a design flaw in that tariffs were largely focused on intermediate rather than final goods, with a net effect of potentially discouraging domestic manufacturing

His question"...the interesting question from an economic point of view, I’d argue, iswhy the trade war appears to have failed. I don’t mean that the burden of tariffs appears to have fallen on U.S. consumers rather than foreign exporters, which was widely predicted. Nor do I mean that the net effect of the trade war on U.S. real income was probably negative, which is also what almost all economists would have predicted. What I mean instead is that the trade war doesn’t seem to have achievedTrump’s stated aims — aims that the rest of us may consider ill-advised, but which should nonetheless have been achievable. Protectionism, it turns out, didn’t reduce the trade deficit, either overall or in manufacturing. It also doesn’t seem to have reversed the ongoing decline in manufacturing as a share of total employment...."

Here is the specific mechanism (see Figure 8)“…The decline of import-substituting industrialization as an economic policy has reduced interest in the details of protectionism — in particular, in the differing effects of tariffs on final versus intermediate goods. But there used to be an extensive literature on “effective protection,” on how the incentives to engage in different stages of the production process depended not only on the overall level of tariffs but on their structure. One main insight of that literature was that developing country tariffs often provided much higher effective protection than the headline tariff rates might suggest. If you put a 20 percent tariff on imported cars, but imported parts accounted for 80 percent of the cost, you were providing 100 percent effective protection to the activity of auto assembly. Another, less emphasized insight was that tariffs on imported inputs provided negative effective protection to downstream activities. And that’s what seems to have happened with the Trump trade war. Tariffs were largely focused on intermediate rather than final goods: The net effect, then, may actually have been to discourage manufacturing!...”

“….One of the insights drilled into every student of international finance is that the current account balance is a macroeconomic phenomenon; trade deficits aren’t caused by asymmetries in protectionism or export subsidies,they are the result of saving-investment imbalances. This is an important insight, but one needs to be careful about its implications. No, asymmetric trade policy doesn’t explain persistent U.S. trade deficits. But that doesn’t mean that a trade war can’t reduce the U.S. deficit in manufactured goods and expand manufacturing employment. There are two key reasons trade policy could, in principle, have affected manufacturing trade and employment. First, while it’s common in textbooks (including mine!) to make the simplifying assumption that savings-investment imbalances are exogenous to trade barriers — that we should write S-I => XM, treating the equals sign as a causal relationship — that isn’t really right. As Obstfeld and Rogoff (2000) argued, barriers to trade in goods and services also have the effect of limiting international capital mobility…since the United States is a persistent capital importer, rising protectionism should, other things equal, reduce those capital imports and hence reduce the trade deficit…. So it’s a mistake to extrapolate from the proposition that trade deficits are a macroeconomic phenomenon to the conclusion that trade policy can’t affect deficits….”

He argues the tariffs were poorly designed, “…How can we explain this lack of any visible effect from a fairly radical break in policy? In my discussions with economists, I generally hear three stories: 1. General equilibrium: Trade balances are determined by the savings-investment balance, so trade policy shouldn’t have an effect. 2. Cross-cutting policies: The 2017 Tax Cut and Jobs Act was supposed to bring about large inflows of capital — which, by a simple accounting identity, should have increased the trade deficit (although it’s unclear whether the Trump team understood that). 3. The structure of the Trump tariffs was poorly designed, even from his own point of view. In what follows, I’ll make the tentative case for (3)…”

Just an FYI your 2016 speech at Mitt’s Utah event was cited by Jonathan Chait in thisweeks New York Magazine

Jonathan Chait, "Even If Trump Loses, Republicans’ Authoritarian Ambitions Will Live On,"New York Magazine, October 24, 2020, https://nymag.com/intelligencer/2020/10/donald-trump-authoritarianism-after-the-election.html

Even If Trump Loses, Republicans’ Authoritarian Ambitions Will Live On

The 2020 election is the first presidential contest since perhaps 1864 in which the principal question is democracy itself. The reelection of Donald Trump, unlikely but terrifyingly possible, would hasten America’s evolution into an oligarchy along the lines of Hungary, Turkey, and Russia, whose illiberal leaders Trump admires and who are, in some cases, working to help him secure a second term.

School civics lessons have boiled democratic values down to inoffensive mush that we associate with clichés expressing supposedly universal values (“government of the people, by the people, for the people”). But democracy is a radical concept, especially in a society as unequal as ours. The tension between an economic system in which power is concentrated in a few hands and a political system in which power is distributed equally places special stress on the political forces aligned with the rich. In Conservative Parties and the Birth of Democracy, Daniel Ziblatt traces the origins of democratic government in Western Europe, arguing that choices made by the right have an outsize role in the success or failure of a fledgling democracy. States where the aristocratic elite accepted majority rule had peaceful and stable transitions (the para-digmatic case is Great Britain). States whose aristocratic elite resisted democratic intrusions emerged fitfully or violently (the paradigmatic case being Germany).

The Republican Party appears to be a special and troubling case, in which the historical pattern has been thrown into reverse. In its original form, the GOP was a radical anti-slavery party, but it abandoned its progressive impulses and has evolved into a wildly reactionary and increasingly authoritarian formation.

On the eve of the 2016 election, I wrote an essay arguing that even if Trump disappeared, which looked more likely than not at the time, the party’s turn away from democracy would continue. I contended that Trump’s authoritarianism was acceptable, even desirable, to the party’s elite, who view as a form of tyranny a system that allows the majority to redistribute wealth from the minority via the ballot box. The 20th-century conservative intellectual Russell Kirk once wrote that “taxation of the prosperous for the benefit of the less wealthy, through the votes of the benefiting crowd … becomes first cousin to theft.”

One passage that stands out from the story four years later is a line uttered by Ed Conard, an investor, an American Enterprise Institute fellow, a Fox Business channel commentator, and the author of The Upside of Inequality — which is to say, an anthropologically perfect specimen of the modern plutocrat. At a gathering of wealthy Republicans, he pondered the challenge posed to the party by Trump’s rise, asking his audience, “So the question is: How do we build a coalition with displaced workers like we did with the religious right after Roe v. Wade and which we used to lower the marginal tax rate from 70 percent to 28 percent … and that leaves us in control, us being advocates of free enterprise, in control of the coalition?” He decided to shock his audience with some bracing candor for what this would entail: “The answer, I believe, is tough, and perhaps even odious, compromises.”

Odious compromises have certainly been abundant in the past four years. While Trump’s deal-making skills have been poor, he did strike one important bargain that he never talks about: He ceded control of domestic policy to congressional Republicans in return for carte blanche to engage in a spate of Nixonian crimes. He has fired or neutered inspectors general, made congressional oversight a dead letter, installed loyalists to run crucial agencies, and mostly erased the once rigidly enforced distinction between official government functions and political propaganda. (Everything from Trump using the White House as a convention stage to signing his name to stimulus checks and food aid, any of which would have once set off a massive scandal, is now shrugged at.)

Trump has found government levers to pressure firms to amplify his propaganda or muzzle his critics — CNN (by investigating its parent-company merger) and the Washington Post (by threatening to raise postal rates and denying a lucrative military cloud-computing contract to Amazon) — and threatened to investigate or break up the tech firms, which have infuriated him by having too many liberals.

Most of his targets have resisted his threats on the rational premise that they could wait out his expected single term. Should he win reelection, that resistance would probably disintegrate. Indeed, most of Trump’s inability to fundamentally corrupt American government is predicated on his political buffoonery outweighing his heavy-handedness. Should democracy survive relatively unscathed, it will be because Trump lost, not because the system “worked.”

With a handful of exceptions, the primary complaint Republican elected officials have with Trump’s authoritarianism is that he lacks a subtle touch. The party’s strategic focus increasingly relies upon an interrelated network of anti-majoritarian steps to allow it to compete for power without compromising with the electorate: suppression of the vote; gerrymandering at the state and federal level; a Senate that underrepresents minorities and urban dwellers; and, looming just over the horizon, a Supreme Court poised to strike down swaths of progressive reforms that Republicans can’t stop in Congress. It’s revealing that Mitch McConnell has spent the waning days before the election trying to stop an economic-stimulus bill, which the public favors by a 50-point margin, to focus instead on locking in another Supreme Court seat. Why cater to public opinion when you can position yourself to thwart it for decades to come?

It’s important to understand the calculations of figures like McConnell and Paul Ryan not as personal cowardice but the expression of a different moral hierarchy. The conservative movement believes that liberty — defined primarily as small government without punitive taxes on the rich — matters more than democracy, that democracy threatens liberty by allowing the many to rob the few. Senator Mike Lee, a leading conservative who briefly expressed disgust with Trump in 2016, this month tweeted out a view that has become almost banal on the right. “We’re not a democracy,” he wrote. “Democracy isn’t the objective; liberty, peace, and prospefity are. We want the human condition to flourish. Rank democracy can thwart that.” One could argue the Republican Party had spent a half-century building an intellectual smoke screen to disguise its anti-democracy agenda and then one of its senators just tweeted it out. Whatever his flaws, Trump stands athwart “rank democracy” and has safeguarded the liberty of the rich to keep their wealth.

The most lasting imprint Trump may have left upon his party is to disabuse its elites of any illusions that “small government” has any authentic purchase with the voters. Trump’s primary domestic accomplishment, his Reaganesque tax cut, is so unpopular he has to periodically promise he will come out with a second round of cuts for the middle class. The tea party turns out not to have any principled objection to deficits, spending, or even the notion that the government will take care of everybody’s health care — something Trump constantly promises to deliver, even though he hasn’t.

Before Trump, some Republicans may have clung to the hope that some version of smaller government and lower taxes might appeal to the majority of the country. Almost none of them can believe that anymore. Yet rather than submit to “rank democracy,” they will find another path, perhaps one like the path Trump has laid out before them.

November 3 is an off-ramp from the road to oligarchy. But whether Trump wins or loses, the Republican evolution into authoritarianism will go on. Even if his presidency ends in complete ruin and repudiation, Trump has given his party something it never had before: the performance of a despot — bullying his rivals, criminalizing anybody who challenges him, violating the law with impunity. They have a taste for it now. They will crave more.

“…On the eve of the 2016 election, I wrote an essay arguing that even if Trump disappeared, which looked more likely than not at the time, the party’s turn away from democracy would continue. I contended that Trump’s authoritarianism was acceptable, even desirable, to the party’s elite, who view as a form of tyranny a system that allows the majority to redistribute wealth from the minority via the ballot box. The 20th-century conservative intellectual Russell Kirk once wrote that “taxation of the prosperous for the benefit of the less wealthy, through the votes of the benefiting crowd … becomes first cousin to theft.”One passage that stands out from the story four years later is a line uttered by Ed Conard, an investor, an American Enterprise Institute fellow, a Fox Business channel commentator, and the author of The Upside of Inequality— which is to say, an anthropologically perfect specimen of the modern plutocrat. At a gathering of wealthy Republicans, he pondered the challenge posed to the party by Trump’s rise, asking his audience, “So the question is: How do we build a coalition with displaced workers like we did with the religious right after Roe v. Wade and which we used to lower the marginal tax rate from 70 percent to 28 percent … and that leaves us in control, us being advocates of free enterprise, in control of the coalition?” He decided to shock his audience with some bracing candor for what this would entail: “The answer, I believe, is tough, and perhaps even odious, compromises.”Odious compromises have certainly been abundant in the past four years. While Trump’s deal-making skills have been poor, he did strike one important bargain that he never talks about: He ceded control of domestic policy to congressional Republicans in return for carte blanche to engage in a spate of Nixonian crimes. He has fired or neutered inspectors general, made congressional oversight a dead letter, installed loyalists to run crucial agencies, and mostly erased the once rigidly enforced distinction between official government functions and political propaganda. (Everything from Trump using the White House as a convention stage to signing his name to stimulus checks and food aid, any of which would have once set off a massive scandal, is now shrugged at.)..”

Natalia Emanuel and Emma Harrington, "The Payoffs Of Higher Pay: Elasticities Of Productivity And Labor Supply With Respect To Wages," Harvard University, November 3, 2020, https://scholar.harvard.edu/files/nataliaemanuel/files/emanuel_jmp.pdf

What the productivity increase looked like in terms of warehouse workers, “….In the three months before the pay change, the treated warehouse moved an average of 4.9 boxes per hour, or 7.7 boxes per moving hour. The time-series of boxes moved per hour is shown in Figure 2, Panel B. As shown in Table 3, Panel A, in the three months following the pay jump at the warehouse, boxes moved per hour increased by 0.328 off a base of 4.92 boxes moved per hour, an increase in productivity of 7 percent. This corresponds to an elasticity of 1.2. Our metric of boxes moved per moving hour is 0.316, an increase of 4 percent. Finally, we find an increase of 0.018 in the ratio of moving to total hours, which corresponds to an increase of 8.6 minutes of moving per person per day. This increase in productivity could come from a number of sources: it could arise from attracting and retaining more productive workers, from workers exerting more effort, or from workers collaborating more seamlessly in light of reduced turnover.…”

Though this new paper would be of interest given the story you told me about the difficulties a Bain portfolio firm had with staffing at their warehouse. Using evidence from a fortune 500 company paper found"... warehouse workers and customer service representatives are responsive to wages, not only with regard to recruitment and turnover, but also with regard to their on-the-job productivity. We estimate recruitment elasticities in excess of 3, turnover elasticities between -3 and -4.5, aswell as productivity elasticities in excess of one.The productivity response to higher pay yields a net positive return. We estimate that80 percent of the improvement in turnover arises from workers’ behavioral responses to higher pay...."

Interesting they found the effect more pronounced for women, "...This paper also estimates gender differences in these elasticities. We find that while women’s labor supply is slightly less elastic than men’s, women increase their productivity in response to higher pay more than do men...."

An Overhyped Tax Credit

The earned-income tax credit is one of those bipartisan policy idols that everybody worships but nobody examines closely for results. Now comes A study showing that its employment benefits are grossly overstated.

Congress created the EITC in 1975 as temporary assistance to increase the marginal incentive to work. The idea, inspired in part by Milton Friedman’s negative income tax, was that tax benefits would increase as workers earned more and phase out after they hit a certain threshold (initially $4,000).

We supported the credit as an alternative to raising the minimum wage because it doesn’t reduce incentives to hire low-skilled workers. But politicians expanded the credit and have kept raising the minimum wage. (Memo to those who want a carbon tax to replace some other tax.) One in five households now claims the credit, and government payments exceed cash welfare by six times.

Complicated rules on eligibility and credit size have encouraged fraud. According to the IRS, a quarter of the $69 billion in EITC payments last year were “improper.” Yet politicians from both parties continue to pump it as a labor inducement. As Princeton economist Henrik Kleven shows, there’s scant evidence it boosts employment.

The biggest EITC expansion occurred in 1993 when Congress doubled the maximum to about $2,152 for taxpayers with one child and tripled it for those with two or more. Most economists have attributed the subsequent spike in labor participation and employment among single mothers to the credit. But Mr. Kleven concludes that the real labor stimulator was welfare reform aided by a booming economy. It’s odd, he notes, that none of the other four EITC expansions in history has been linked to higher labor participation among single mothers. So what was special about the 1993 expansion?

Some economists have posited that the 1993 expansion was simply larger than the others, though this doesn’t explain why employment increased most among women with more children. Following the 1993 expansion, employment increased by 10 percentage points among single mothers with one child, 15 points among those with two, 20 among those with three and 30 points among those with four or more. Mr. Kleven says this pattern is more consistent with state and federal welfare reforms in the early 1990s that reduced government cash benefits most among women with more children.

Before Congress passed welfare reform in 1996, 113 state and county waivers were approved to establish work requirements and family size caps and time limits on benefits. A 2016 study found Connecticut’s welfare waiver induced many women to work. Yet Mr. Kleven finds in his study that state EITC expansions have not produced a similar effect.

“Overall and contrary to consensus, the case for sizable extensive margin effects of the EITC is fragile,” Mr. Kleven concludes. His study adds to the economic research finding that the EITC phase-out causes steep infra-marginal tax rates as workers make more money.

None of this may bother Republicans or Democrats who want to redistribute more income, but they shouldn’t claim these welfare tax payments are an incentive to work.

Reconciling their work with Kleven’s“…Column (3) adds fixed effects for the interaction between year and presence of children. Recall that the fundamental identification approach in studying the EITC is the interaction of year and whether a household had children present, so the inclusion of these fixed effects absorbs most of the variation in the EITC, leaving only the differences across family sizes for those with 20 children to identify the effects. When these controls are added, the EITC’s impact on annual employment is no longer significant in either the low-education sample or among all observations, though the impact on worked last week is still significant in this specification. Following Kleven, column (4) adds a three-way fixed effect, interacting presence of waivers with presence of children with year. Once this additional control is added, coefficients on the EITC variable lose statistical significance in all four specifications. It is unsurprising that these fixed effects that absorb most of the variation used to identify the EITC’s impact also absorb its impact on employment. Instead of employing a differences-in-differences approach, Kleven (2019) estimates an event study which allows the coefficient on indicators for presence of welfare waivers (which vary at the state and year level) to vary by children-times-year. We exactly replicate his findings (column 3 of Table 6) in Appendix Table 5. Kleven shows estimates on the year-3 and year-10 post-EITC expansion coefficients; we also include year 5. We present estimates separately for the low-education sample and the overall sample of unmarried women, and for annual employment as well as whether the respondent worked in the prior week. When waivers*children*year fixed effects are included, year 3 effects are small and not statistically significant, though those in years 5 and 10 are. When this three-way fixed effect is omitted, we find consistent, positive impacts of the EITC on employment….”

new Strain pushes back at Kleven's argument that EITC gains were largely driven by welfare reform. He finds that states without early welfare reform had strong EITC impacts, suggesting welfare reform didn't do all the work, on average employment increase by ~ 5 percentage points 5 years after an EITC expansion (See Figure 3, F “All Federal Reforms”) “…When studying all federal expansions together, we find that a $1,000 increase in the size of the maximum credit is associated with a 3.2 to 3.7 percentage point increase in employment among unmarried mothers with low levels of education. When examining both federal and state expansions together, we find a 2.9 to 3.3 percentage point increase in employment…”

Looking at a series of EITC expansions, “…. We find robust evidence that four of the five credit expansions increase employment among unmarried mothers. The exception is the 2009 expansion, which was targeted on households of a specific size and occurred during a period of historically weak labor demand following the 2008 financial crisis and Great Recession. We also look more closely at the 1993 expansion and conclude that this generous credit expansion increased the extensive margin of labor supply separate and apart from any pro-work reforms to state welfare systems that occurred at the same time. Finally, we study the EITC holistically, pooling all five expansions into one event-study framework and using continuous variation in the size of the maximum EITC benefit to estimate its employment elasticity. To our knowledge, the only other paper to look comprehensively at all five federal EITC expansions is Kleven (2019), which comes to different conclusions. Specifically, Kleven finds little evidence for an EITC extensive margin effect. We find the opposite, reconcile our findings with Kleven, and argue that our analytic approach is most appropriate….”