The Atlantic has published an excerpt from one of my favorite ebooks of last year, Launching an Innovation Renaissance. I might have chosen a different excerpt, but it is quite good all the same. In my ideal world, the U.S. center-right would embrace Tabarrok’s basic narrative and build its domestic policy agenda around it. I find this prospect somewhat more likely now than I had in, say, 2008, though the rise of Newt (ironically, given his oft-proclaimed technophilia) gives me pause.
In my latest column for The Daily, I argue that Mitt Romney has been misunderstood by the public. As Radley Balko recently suggested, he has come to evoke the villain in a John Hughes film — the handsome preppie with a villainous heart. This is the candidate the president and his allies intend to run against. Yet Romney is better understood as the earnest and uncool hero of a John Hughes film, who is always keen to do the right thing but who is constantly undermined by his extreme social awkwardness. Rich Lowry, in a related vein, argues that Romney is “the last WASP,” for whom politeness and gentleness of spirit is often mistaken for stiffness and a lack of authenticity. I am somewhat more inclined than Rich to believe that Romney can turn his awkwardness into an advantage, but that remains to be seen.
Recently, I’ve been struck by the interesting way in which Alan Krueger has been presenting research findings in the course of advancing President Obama’s domestic policy agenda. It brought to mind his 2002 paper (co-authored by Stacy Berg Dale) in the Quarterly Journal of Economics on the payoff to attending a more selective college, which received considerable attention at the time. The core conclusions from the paper read as follows:
Although most of the previous literature has implicitly assumed that the returns to attending a selective school are homogeneous across students, an important issue in interpreting our findings is that there may be heterogeneous returns to students for attending the same school. Some students may benefit more from attending a highly selective (or unselective) school than others. For example, a student intent on becoming an engineer is likely to have at least as high earnings by attending Pennsylvania State University as Williams College, since Williams does not have an engineering major. In this situation, if students are aware of their own potential returns from each school to which they are admitted, they could be expected to sort into schools based on their expected utility from attending that school, as in the Roy model of occupational choice. In other words, the students who chose to go to less selective schools may do so because they have higher returns from attending those schools (or because there are nonpecuniary benefits from attending those schools); however, the average students might not have a higher return from attending a less selective school over a more selective one. Nonetheless, contrary to the previous literature, this interpretation implies that attending a more selective school is not the income-maximizing choice for all students. Instead, students would maximize their returns by attending the school that offers the best fit for their particular abilities and desired future field of employment. [Emphasis added]
This is interesting and important, and it is easy to see why status-obsessed journalists found the paper fascinating.
As friend points out, however, there is another dimension to this picture, i.e., the internal real rate of return, which the authors’ calculate on p. 1520. Because the difference in tuition between selective and less-selective schools wasn’t that great during the period studied, the IRR is incredibly high. This finding, however, drew relatively little attention:
Although the implied internal rates of return to investing in a more expensive college in Table VIII are high, one should recognize that the average cost of tuition has roughly doubled in real terms since the late 1970s, and the payoff to education increased in general since the late 1970s. The implicit internal real rate of return for the estimate in column 5 of Table VIII falls to 8 percent if tuition costs are doubled. Indeed, the supernormal return to investing in high-tuition education in the 1970s may explain why it was possible for colleges to raise tuition so much in the 1980s and 1990s.
The relevant consideration, of course, is the tuition gap between selective and less-selective schools. Tuition costs have been increasing across a wide range of schools, including less-selective schools. Demand for a certain kind of elite college experience has soared with rising affluence, and in particular with the expansion of the college-educated upper-middle-class. This, in turn, has allowed a number of schools that had been considered less-selective to become increasingly selective. We’ve also seen a positional arms race in which schools compete for scarce resources, like star faculty, and offer increasingly expensive amenities for students and staff. Given the tournament-like nature of compensation in some skilled professions, it is at least possible that the pecuniary benefits of attending a selective school relative to a non-selective school have actually increased rather than decreased.
This conclusion, however, would have been less eye-catching. In fairness, I’m far more inclined to blame journalists for largely missing this possibility than SBD and ABK.
The president has advocated sharp increase in the taxation of capital income. As Donald Marron explains, however, we can expect a steep increase if Congress simply does nothing on this front between now and the start of next year:
First, the 2001 and 2003 tax cuts are scheduled to expire. If that happens, the regular top rate on capital gains will rise to 20%. In addition, an obscure provision of the tax code, the limitation on itemized deductions, will return in full force. That provision, known as Pease, increases effective tax rates on high-income taxpayers by reducing the value of their itemized deductions. On net, it will add another 1.2 percentage points to the effective capital gains tax rate for high-income taxpayers.
And that’s not all. The health reform legislation enacted in 2010 imposed a new tax on the net investment income of high-income taxpayers, including capital gains. That adds another 3.8 percentage points to the tax rate.
Put it all together, and the top tax rate on capital gains is scheduled to increase from 15% today to 25% on January 1. That’s a big jump. If taxpayers really believe this will happen, expect a torrent of asset selling in November and December as wealthy taxpayers take final advantage of the lower rate.
Of course, the tax cuts might get extended for all Americans, including high-income taxpayers. That’s what happened in 2010. In that case, the increase in the capital gains rate will be smaller. Because of the health reform tax, the top capital gains tax rate will increase from 15% to 18.8%. That’s still a notable increase, but would likely set off much less tax-oriented selling this year.
The only way that the top capital gains tax rate remains at 15% will be if the tax cuts are extended for high-income taxpayers and the new health reform tax gets repealed. That’s a key distinction in the election: President Barack Obama opposes those steps, while the GOP presidential candidates favor them (and some candidates would cut the capital gains tax rate even further).
One wonders if middle and upper-middle-income investors are sufficiently well aware of the distance between the positions of the major Republican candidates and the president on capital income taxation. (I assume that wealthy investors have given this some thought.)
Of the world’s ten most productive cities, six are located in the United States. Matt writes:
I don’t have a huge policy point to make about this, but I will note that people sometimes wonder why the high-tech economy doesn’t create broadly shared prosperity. Part of the answer has to be that the specific places in the United States where high-tech industry is concentrated are, in fact, among the most propserous places in the world. It’s just that relatively few people live in them.
I’ll volunteer a policy point: (a) we should make it easier for more people to live in these cities by easing zoning restrictions and licensing restrictions that raise the cost of construction, transportation, etc., a cause that Matt Yglesias and Ryan Avent have skillfully advanced, building on the work of Edward Glaeser, Donald Shoup, and others; and (b) we need to recognize that service work, and more specifically the outsourcing of household production, is an effective channel both for increasing overall productivity and for facilitating sustainable job creation.
In the past, I’ve framed this as “in the future your children will be servants and nannies,” a provocation that gets to a deeper truth: the most problematic geographical mismatch we face in the U.S. is that large numbers of relatively poor, less-skilled individuals live in rural areas and urban and suburban areas that don’t have good transportation links to affluent, high-skilled households that spend much of their income on high-touch services. Despite, or perhaps reflecting, the popularity of Downton Abbey, many of us are fundamentally scandalized by the idea of serving others, despite the fact that most of us make a living by serving others, whether directly or indirectly. And so we fetishize manufacturing jobs in which the fact that we are serving others is mediated by the fact that we are assembling physical objects designed to serve others.
I’m inclined to consider this geographical mismatch a bigger deal than most, though of course I don’t attribute today’s stagnant labor market to this factor as such. Taking this mismatch somewhat more seriously raises the importance of the zoning reform agenda and other measures designed to lower transportation costs.
Noam Scheiber of The New Republic has an astute take of Mitt Romney’s references to “the politics of envy,” a phrase that has angered many on the left:
The elder Romney spent his early childhood in Mexico, where the Romney clan had fled a generation earlier to escape U.S. anti-polygamy laws. By the early twentieth century, the Romneys had begun to prosper. George’s father, Gaskell—who only had one wife—was an affluent carpenter with a thriving home-building business.
But, in 1911, Mexico’s Mormon community found itself in the cross fire of a civil war. The Mormons proclaimed their neutrality; the rebels proclaimed their indifference. They first confiscated the Mormons’ horses—including George’s beloved pony, Monte—then came for their weapons. Before long, thousands of Mormons had fled back into the United States.
The episode made a lasting impression on Romney senior. He later described his family and the other refugees as “the first displaced persons of the twentieth century.” Even more interesting was the way it shaped his views on class warfare in its most literal incarnation. “I was kicked out of Mexico when I was five years old, because the Mexicans were envious of the fact that my people, who, when they went down there, were just as poor as the Mexicans, … became prosperous,” he said in a speech in 1961. “The Mexicans thought, if they could just take it away from the Mormon settlers, it would be paradise. It just didn’t work that way, of course.”
Perhaps not surprisingly, George Romney had a habit of seeing contemporary questions through the prism of his expulsion from Mexico. “One of the real problems we face is to help other nations of the world to achieve what we have achieved before their envy turns them against us to a point where they help destroy us,” he said in the same speech. In a report he delivered to the people of Michigan after the weeklong Detroit riot in 1967, Romney identified one of the causes as the “great concentrations of unskilled and uneducated people living in unbelievable poverty and indignity, surrounded by the world’s first generally affluent society.”
Given Mitt’s close relationship with his father—according to The Boston Globe’s Scott Helman and Michael Kranish, his only real act of youthful rebellion was to fly home from college on weekends to see his future wife, Ann—it’s inconceivable that he wouldn’t have assimilated these lessons. In fact, persecution by jealous outsiders wasn’t just central to the Romney family narrative, it was a key feature of Mormon sociology. “I am a member of a religion that is among the most persecuted minority groups in our history,” George Romney once said. For several generations beginning in the mid-nineteenth century, the story of both the Romneys and Mormonism writ large was a cycle of poverty, followed by hard work and affluence, and then poverty again, as the Mormons fled their tormentors. [Emphasis added]
In a similar vein, many of Britain’s African Asians, i.e., descendants of Indian merchants, entrepreneurs, and workers who settled in Kenya and Uganda before intense political pressure led them to emigrate, have gravitated towards the political right. The same is true of members of many other “market-dominant minorities,” to use Amy Chua’s phrase. (This is one device we can use to understand the political character of recent immigrant groups: were members of this group subject to dispossession at the hands of an arbitrary government in their native country? Or were members of this group part of the politically dominant majority? Migrants have long been disproportionately drawn from market-dominant minorities, for obvious reasons, but cultural similarity and geographical proximity play a cross-cutting role.)
As Arpit Gupta has observed, elites in multi-ethnic societies tend to be drawn from groups that were in some sense historically “pre-adapted to modernity.” In India, for example, members of castes that placed a heavy emphasis on commerce or on cultivating intellectual achievement, like the historically poor but socially prestigious priestly caste, have found themselves massively overrepresented in the elite strata of society. Or consider Jamie Doward’s summary of Gregory Clark’s recent findings regarding social mobility in Britain:
Drawing on data culled from official records that go back as far as the Domesday Book as well as university admissions and probate archives, Gregory Clark, a professor of economics at the University of California, has tracked what became of people whose surnames indicated their ancestors had come from either the aristocratic or artisanal classes.
By studying the probate records of those with “rich” and “poor” surnames every decade since the 1850s, he found that the extreme differences in accumulated wealth narrowed over time.
But the value of the estates left by those belonging to the “rich” surname group, immortalised in the character of Fitzwilliam Darcy, the estate-owning hero in Jane Austen’s Pride and Prejudice, were above the national average by at least 10%, a statistically significant figure.
In addition, today the holders of “rich” surnames live three years longer than average, life expectancy being a strong indicator of socio-economic status.
The findings, described by Clark as sending a “clear, powerful, shock to our casual intuitions”, undermine the commonly held belief that important societal developments such as the creation of the welfare state helped to level modern society’s playing field. “The huge social resources spent on publicly provided education and health have seemingly created no gains in the rate of social mobility,” he said.
Suffice it to say, not everyone will embrace Clark’s thesis. Were we to do so, however, we might draw a few conclusions, among them that the chief benefit of the welfare state is that it prevents individuals from becoming destitute, not that it leads its beneficiaries to start cultivating the virtues that tend to facilitate the accumulation of human capital and wealth. This framework suggests that it is absolute well-being and absolute upward mobility that should concern us, not relative well-being or relative upward mobility. The cultivation of virtue is, if we take this view seriously, primarily the responsibility of kinship groups or civil society, not the state; we assume that the diffusion of cultural practices that tend to be associated with wealth accumulation will happen somewhat slowly, and that it can’t be directed through a top-down process.
Let’s return to Noam’s piece:
Of course, as an explanation for the frustrations of the down-and-out, “envy” is more than a little condescending. Even if there are times when class envy really does drive human behavior—perhaps revolutionary Mexico was one—it’s far more plausible that the poor and disenfranchised simply want opportunity and economic security for themselves, not less of these things for others. Still, the elder Romney’s response to this slightly stunted analysis was admirably progressive. It was one of the reasons he favored foreign aid, an end to discrimination, and subsidized preschool and summer school. He was the model of a ’60s-era, liberal Republican.
Yet as Noam has observed in the past (not, alas, in a piece I can locate via TNR’s website), populist appeals that center on combating inequality have tended to appeal to upper-middle-class voters rather than lower-middle-class or working class voters, at least in intra-Democratic politics over the last decade. The political tendency Romney is criticizing is not a “politics of envy” driven by “the frustrations of the down-and-out.” Rather, he is, I suspect, criticizing a “politics of envy” driven by relatively privileged people who tend to be more concerned about the competition for positional goods in dense metropolitan areas than about chronic unemployment and underemployment in marginalized communities.
I have one small objection to Noam’s piece:
George Romney was in many ways a progressive Republican, having bravely embraced the causes of civil rights, labor unions, and public education even as his party was turning away from them. But he was nonetheless a Republican—a deep believer in self-help, private initiative, and small government. And for him, the politics of envy were deeply personal.
George Romney may well have been a believer in small government, but he doubled state spending levels in Michigan during his gubernatorial tenure and he fought for and secured Michigan’s state income tax, a cause that is not traditionally associated with deep believers in small government. He also championed the unionization of public school teachers in Michigan, a stance that wasn’t exactly brave given the state’s political configuration at the time. His strong support for civil rights was, however, very impressive, and could reasonably be characterized as brave.
I’m really proud that NRO is publishing Artur Davis, who does a far better job of making the case against the Obama administration than all but a small handful of Republicans. In a column making the case that the GOP should draft Jeb Bush, Davis offers the following aside:
One doesn’t have to subscribe to Gingrich’s Manichean rhetoric to concede that an Obama sweep would, for the first time in 76 years, institute government-centered, redistributionist economics as the country’s central governing philosophy. It would be, after all, the agenda that Obama and congressional Democrats had campaigned on, in contrast to the deliberately muted, ideologically vague platforms that elected Carter, Clinton, and Obama in 2008; or the growth-oriented, business friendly liberalism that JFK and LBJ embodied.
He also identifies Jeb Bush’s virtues, and how the former Florida governor might redefine the GOP:
His brand of reform-oriented conservatism might actually be his party’s only pathway: Unlike Romney, whose leadership of Massachusetts produced one signature achievement — a hodgepodge of a health-care law that he likely wishes he could take back — Bush’s legacy is an issue that Republicans ought to own but are ignoring, education reform. He also turned Florida into a national laboratory for controlling health-care costs and reining in medical tort liability, both soft spots in Obama’s record.
At the same time, Bush has revealed a capacity for coalition-building that has eluded Gingrich. He is a hero of the conservative base who has had remarkable electoral appeal to Jewish and Hispanic voters. He combines support for a modified version of the DREAM Act with backing stronger border security — a middle ground that is both tough-minded and assimilationist — and happens to be entering his fourth decade of marriage to a Hispanic woman. It goes without saying that Bush gives Republicans the best shot of removing Florida from the Democratic column, and winning states with a strong Latino presence such as Arizona and Colorado.
The fact is that Jeb Bush bent Florida, a famously interest-group-ridden state, in a rightward direction; that’s an accomplishment Romney can’t begin to claim vis-à-vis Massachusetts. Bush is not just an authentic movement conservative, but a groundbreaker on an array of issues that drive votes, such as accountability for teachers and reining in the costs of private health insurance. While his record has blemishes that Democrats would exploit, from his stint in the Eighties lobbying for southern-Florida business interests to his ill-timed tenure at Lehman Brothers in 2007, this Bush is an adept, articulate campaigner who is unlikely to be tied in knots defending his history.
Davis’s implicit prescription for Republicans in 2012 is to focus on education reform, controlling health care costs, and finding a coherent middle ground on immigration. Though I imagine I might disagree with Davis on some of the details, this is very sound. Controlling health care costs, for example, relates directly to very real concerns about sluggish wage and household income growth, and Republicans can make a decent case that shifting the liability for cost growth from the privately insured to taxpayers isn’t exactly a sustainable solution to the underlying problem.
If there really is resistance among Alabama Republicans to embracing Davis as one of their own, Alabama Republicans are doing the country a serious disservice.
At a time when other countries are doubling down on education, tight budgets have forced States to lay off thousands of teachers. We know a good teacher can increase the lifetime income of a classroom by over $250,000.
Not surprisingly, the president didn’t note the other important finding from the Chetty et al. research, which is that a very ineffective teacher can decrease the lifetime income of a classroom by the same amount.
A great teacher can offer an escape from poverty to the child who dreams beyond his circumstance.
If this is true, one could just as easily say that a terrible teacher could help consign a child on the margins of society to a life of poverty. Viewed through this lens, policies that emphasize hiring large numbers of teachers even at the risk of diluting the teacher talent pool seems like a profoundly dangerous approach.
Every person in this chamber can point to a teacher who changed the trajectory of their lives. Most teachers work tirelessly, with modest pay, sometimes digging into their own pocket for school supplies – just to make a difference.
It makes political sense for the president to celebrate teachers, who vote in large numbers, who tend to back Democratic candidates, and who in most states belong to labor organizations that channel large sums of money to politicians who favor increasing compensation levels for teachers without a commensurate emphasis on improving the quality of instruction. It’s not clear, however, that most teachers work longer hours for less pay than they would in another profession, though there are presumably many who do.
Teachers matter. So instead of bashing them, or defending the status quo, let’s offer schools a deal. Give them the resources to keep good teachers on the job, and reward the best ones. In return, grant schools flexibility: To teach with creativity and passion; to stop teaching to the test; and to replace teachers who just aren’t helping kids learn.
And here we come to the good idea: “replace teachers who just aren’t helping kids learn.” It is, however, not clear that the federal government has much leverage in this space, or that the Obama administration would be willing to use what leverage it does have to challenge the interests of unionized public school teachers.
Another intriguing idea relates to higher education:
At a time when Americans owe more in tuition debt than credit card debt, this Congress needs to stop the interest rates on student loans from doubling in July. Extend the tuition tax credit we started that saves middle-class families thousands of dollars. And give more young people the chance to earn their way through college by doubling the number of work-study jobs in the next five years.
Of course, it’s not enough for us to increase student aid. We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money. States also need to do their part, by making higher education a higher priority in their budgets. And colleges and universities have to do their part by working to keep costs down. Recently, I spoke with a group of college presidents who’ve done just that. Some schools re-design courses to help students finish more quickly. Some use better technology. The point is, it’s possible. So let me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down. Higher education can’t be a luxury – it’s an economic imperative that every family in America should be able to afford. [Emphasis added]
This is encouraging — indeed, it reminds me of the work of economist Vance Fried of Oklahoma State. But how far is the president willing to go to take on the large and lucrative “non-profit” higher education industry (he has already demonstrated a willingness to take on for-profit higher education)?
I very much enjoyed Josh Barro’s analysis of SOTU 2012. Josh is an advocate of large-scale mortgage modification and NGDP targeting as instruments for accelerating the economic recovery. Though I was once enthusiastic about the former, I’m now much less so, in part because of the administrative challenges and the potential implications for vulnerable financial institutions. (No, I don’t care about vulnerable financial institutions as such. Rather, I think timing is important.) And though I’ve been favorably inclined towards the arguments for NGDP targeting, Ashwin Parameswaran has given us reason to be skeptical. I’d much rather Josh were right about mortgage modification and NGDP targeting, as they’re both levers we can imagine a Democratic or Republican president pulling under the right circumstance, but I’m just not sure they’ll work as intended.
My Economics 21 colleague James Capretta argues that President Obama failed to make a compelling case for the connection between steep increases in taxes on capital income, increased public spending, and wage growth for the middle class:
There’s no question that the president’s populist, tax-the-rich rhetoric resonates with a segment of the electorate that has struggled economically and is all-too-willing to accept the simplistic explanation that the blame for their troubles lies with the so-called “rich.”
But what President Obama didn’t explain last evening — indeed, has never really explained — is how a tax hike on higher income households will help the struggling middle class.
Because it’s not at all obvious it would.
For starters, if, as the president proposes, the rich are taxed at higher rates but the government’s main entitlement programs remain entirely unreformed, the government’s deficit and debt problems will not be solved. According to the Congressional Budget Office (CBO), spending on Social Security, Medicare, and Medicaid was just 6.0 percent of GDP. In 2030, spending on those programs plus ObamaCare is expected to reach 15.2 percent of GDP (using assumptions about health cost growth that is slightly more realistic than current law). That jump in spending is the real cause of our fiscal problems. If, as the president proposes, the Bush tax cuts are allowed to expire for those with incomes above $200,000 ($250,000 for couples), that might raise revenue by about 0.4 percent of GDP per year. That’s not nearly enough to cover the explosion in entitlement spending that will occur over the coming two decades.
Moreover, there’s strong evidence that higher taxes will hurt growth and job creation, despite the claims of the president to the contrary. Among economists, it’s really a debate about how damaging higher tax rates will be to growth and job creation. There’s no real debate that such taxes are neutral in that regard.
This is a fair characterization in that virtually all economists believe that there is some harm associated with higher tax rates, but I’d recommend reading Arpit Gupta’s recent guest post on labor supply on taxes. Microeconomists like Peter Diamond and Emmanuel Saez have called for steep increases in the top rate of marginal tax, as they believe the impact on labor supply will be negligible. In contrast, research that factors in the extensive margin (i.e., whether or not one participates in the formal labor market) as well as the intensive margin suggests that the impact of taxes on labor supply is in fact quite large.
But even setting aside the likely damage that would ensue from higher taxes, the president has never articulated a coherent theory about how a presumably larger government would bring about higher paying jobs for the middle class. Because there’s no evidence whatsoever that the middle class or anyone else will be better off if the government increased spending on items that the president likes to call “investments.” The president is not calling for stimulus spending to raise aggregate demand in a Keynesian sense. He long ago abandoned that line of argument. No, what he proposed last night is simply more spending on certain programs finance by higher tax collection. Thus, any benefit to the middle class would have to come from the quality of the government’s “investments.”
Unfortunately for the president, there’s no evidence that more governmental spending will lead to better jobs for anyone.
There is evidence to believe that more governmental spending will lead to better jobs for some nontrivial number of public employees, but of course much depends on (a) what we think of as “better jobs” and (b) whether we conceive of the public sector as a program designed to create employment or as a vehicle for the efficient delivery of public service. One definition of a “better job” could be a job in which once receives a higher level of compensation, even as underlying work effort remains unchanged. People tend to get better jobs, according to this definition, in tight labor markets. Yet another way to secure a better job is to secure higher compensation levels in the public sector than one might receive in the private sector. As it turns out, this proved to be a significant part of the labor market picture during the 1990s and 2000s, as local school districts dramatically reduced student-teacher ratios, in the process diluting the teacher talent pool and potentially creating a mismatch between compensation levels and underlying skill levels.
If we believe, as I do, that the public sector should in fact be a vehicle for providing high-quality services at the lowest cost to the taxpayer, channeling public spending in this way doesn’t seem like a wise or sustainable course of action. Regardless, it is politically attractive for the coalition that is most tightly aligned with the interests of current public employees. The president made reference to layoffs of teachers and other public sector professionals; it is also true, however, that jurisdictions in which local school districts were given the ability to unilaterally revise the terms of employment were far less likely to lay off employees that those that were not. The president has been sharply critical of giving local governments this ability.
He mentioned against last evening that job training is a central component of his program. But federal job training efforts have a four decade record of failure, and the president’s speech gave no indication that his administration has found a way to deliver services in ways that will lead to better results.
James Heckman and Pedro Carneiro’s contribution to Inequality in America: What Role for Human Capital Policies? is instructive on this front. Tellingly, Heckman and Carneiro were engaging Alan Krueger, who offers a modest defense of job training programs. Suffice it to say, I think Heckman and Carneiro have the stronger argument.
After the deep recession of 2008 and 2009, what the country needs more than anything else is a period of robust economic growth. That’s the only remedy that will truly help the American middle class.
This sounds right. So the key question regarding the various SOTU proposals is whether or not they will prove growth-enhancing. My initial impression is that dramatic increases in capital income taxation and a series of new targeted tax breaks, sharp increases in public spending with relatively little regard for increasing public sector productivity (the caveat applies to an effort to consolidate agencies that subsidize small and medium-sized corporations, which may improve the productivity of a part of government that arguably undermines the allocative efficiency of the economy as a whole), and the strategic disfavoring of the oil and gas industry will not prove growth-enhancing, but of course we can’t say anything for sure.
Given that Bruce Bartlett is one of the most scathing critics of Republican tax policy, his remarks concerning President Obama’s tax proposals struck me as worthy of note:
Rather than proposing a cleaning-up of the tax code, Mr Obama is proposing several new tax preferences. He wants a special deduction available only to companies engaged in manufacturing to be doubled, but most tax specialists think this should just be abolished. He’s in favour of extending a tuition tax credit, which mostly gets capitalised into higher tuition fees and does little to improve access to higher education for middle class families. There’s also special tax relief for small businesses “that are raising wages and creating good jobs” that he wants to introduce even though no one knows how to target such incentives and past efforts have failed. Finally, he would like a new tax credit for “clean energy” and tax credits for companies hiring military veterans.
At the same time, Mr Obama proposes a variety of gimmicky new tax penalties, to punish companies that move jobs overseas for example. He wants to force every US-based multinational corporation to pay a minimum tax, and made individuals earning at least $1m per year to pay at least 30 per cent of their income in tax.
Whatever the merits of these specific tax proposals, they do not move towards tax reform. They move in the opposite direction, by cluttering up the tax code with still more special tax breaks for activities in current political favour and penalties for individuals and businesses in disfavor. This is exactly the sort of thing that created America’s current tax mess.
At a minimum, Mr Obama should have directed the Treasury Department to begin a study of tax reform as Ronald Reagan did in his 1984 State of the Union Address, which paved the way for the Tax Reform Act. Mr Obama’s decision to move away from reforming the tax code this year is both a substantive and political error that I believe he will come to regret.
Though I agree that the shift away from tax reform Bartlett describes represents a substantive error, it’s not clear that it also represents a political error. Upper-middle-income voters, particularly those employed directly or indirectly by the public sector, are very receptive to efforts to redress rising inequality. (The most effective antidote for rising inequality, as Megan McArdle has observed, is the destruction of wealth that tends to accompany a prolonged economic crisis, but this generally goes unremarked upon.) This is a crucial constituency for the president, and he aims to secure it with populist appeals.
Given that Bruce Bartlett is one of the most scathing critics of Republican tax policy, his remarks concerning President Obama’s tax proposals struck me as worthy of note:
Rather than proposing a cleaning-up of the tax code, Mr Obama is proposing several new tax preferences. He wants a special deduction available only to companies engaged in manufacturing to be doubled, but most tax specialists think this should just be abolished. He’s in favour of extending a tuition tax credit, which mostly gets capitalised into higher tuition fees and does little to improve access to higher education for middle class families. There’s also special tax relief for small businesses “that are raising wages and creating good jobs” that he wants to introduce even though no one knows how to target such incentives and past efforts have failed. Finally, he would like a new tax credit for “clean energy” and tax credits for companies hiring military veterans.
At the same time, Mr Obama proposes a variety of gimmicky new tax penalties, to punish companies that move jobs overseas for example. He wants to force every US-based multinational corporation to pay a minimum tax, and made individuals earning at least $1m per year to pay at least 30 per cent of their income in tax.
Whatever the merits of these specific tax proposals, they do not move towards tax reform. They move in the opposite direction, by cluttering up the tax code with still more special tax breaks for activities in current political favour and penalties for individuals and businesses in disfavor. This is exactly the sort of thing that created America’s current tax mess.
At a minimum, Mr Obama should have directed the Treasury Department to begin a study of tax reform as Ronald Reagan did in his 1984 State of the Union Address, which paved the way for the Tax Reform Act. Mr Obama’s decision to move away from reforming the tax code this year is both a substantive and political error that I believe he will come to regret.
Though I agree that the shift away from tax reform Bartlett describes represents a substantive error, it’s not clear that it also represents a political error. Upper-middle-income voters, particularly those employed directly or indirectly by the public sector, are very receptive to efforts to redress rising inequality. This is a crucial constituency for the president, and he aims to secure it with populist appeals.
Earlier this week, Tim Lee of Ars Technica published a piece on the broader implications of the anti-SOPA backlash. To the surprise of some observers, it was Republican legislators who defected from SOPA in the largest numbers, in part due to a sophisticated grassroots campaign. Patrick Ruffini and I argue that this isn’t a mere coincidence, but rather a reflection of certain underlying structural dynamics, e.g.:
Salam and Ruffini told Ars on Thursday that the differing reactions to the online protests reflects structural and philosophical differences between the two parties. They said Democrats have deep ties to Hollywood and to labor unions who staff Hollywood productions, which makes it hard for them to buck these interests and vote against PIPA. In contrast, they said, Republicans have few ties to groups that support PIPA, and they have a Tea Party faction that has grown increasingly invested in Internet freedom as it has become more reliant on the web for its own organization.
The IT industry could be a rich source of both votes and campaign cash, but so far neither party has done a good job of championing its interests in Congress. Salam and Ruffini believe that Silicon Valley’s entrepreneurial culture is a perfect fit for the GOP’s free-market policy agenda, and they told Ars that the fight over PIPA is a golden opportunity for the GOP to build a lasting political alliance with Silicon Valley.
I should stress that there is a deep cultural divide between Silicon Valley and the Republican base. In part, Ruffini and I are making an argument about the Republican future, i.e., over time, Republicans will become more culturally “in tune” with the technology industry and that at least some slice of the technology industry will grow more skeptical towards the Democrats, particularly if the parties polarize around IP. In my view, it is natural for a pro-market party to oppose copyright extensions and to favor the rollback of software patents, which tend to cause a kind of economic “gridlock” as resources flow to defensive litigation and regulatory arbitrage and away from exploratory innovation. And it is natural for a political coalition that fears disruptive economic change (see the attacks on private equity, etc.) to want to strengthen culturally influential incumbents, like the major motion picture and recording companies. The right hasn’t fully cottoned to the critique of a strong incumbent-protecting IP regime, but the idea seems far more plausible now than it had even a few months ago.
This will be the subject of my next essay for NR, incidentally. The anti-SOPA backlash was, in my view, the most encouraging political development in recent memory, and I aim to explain why.
Recently, Eric Lichtblau of the New York Times published a fascinating report on William Delahunt, a former member of Congress from coastal Massachusetts, and his activities since leaving office:
Soon after he retired last year as one of the leading liberals in Congress, former Representative William D. Delahunt of Massachusetts started his own lobbying firm with an office on the 16th floor of a Boston skyscraper. One of his first clients was a small coastal town that has agreed to pay him $15,000 a month for help in developing a wind energy project.
Amid the revolving door of congressmen-turned-lobbyists, there is nothing particularly remarkable about Mr. Delahunt’s transition, except for one thing. While in Congress, he personally earmarked $1.7 million for the same energy project.
So today, his firm, the Delahunt Group, stands to collect $90,000 or more for six months of work from the town of Hull, on Massachusetts Bay, with 80 percent of it coming from the pot of money he created through a pair of Energy Department grants in his final term in office, records and interviews show.
Given that Senator Scott Brown and his leading Democratic rival, the populist Harvard Law School professor and Obama ally Elizabeth Warren, have placed heavy emphasis on political reform, one assumes that they’ll both have much to say about Delahunt in particular and “influence-peddling” more broadly.
Kevin Carey, one of my favorite education thinkers, writes on the profound significance of MIT’s new credentialing initiative, MITx:
Beginning this spring, students will be able to take free, online courses offered through the MITx initiative. If they prove they’ve learned the material, MITx will, for a small fee, give them a credential certifying as much.
In doing this, MIT has cracked one of the fundamental problems retarding the growth of free online higher education as a force for human progress. The Internet is a very different environment than the traditional on-campus classroom. Students and employers are rightly wary of the quality of online courses. And even if the courses are great, they have limited value without some kind of credential to back them up. It’s not enough to learn something—you have to be able to prove to other people that you’ve learned it.
Because MITx is built on an open platform, other colleges and universities can join in the effort with relative ease. Assuming the MITx credential gains currency, we can imagine a shift in the balance of power between students and elite institutions. A variety of nontraditional educational providers will spring up, promising to offer high-quality instruction at low cost, the value of which will be certified by an MITx credential.
And as it turns out, a new provider, Udacity, was just launched at this year’s DLD Conference in Munich. We are at the start of a larger unraveling of incumbent educational providers that has the potential to dramatically expand human potential.
Bracketing the question of how we should tax capital income, a subject we discussed last week, I wonder if we’re thinking about Mitt and Ann Romneys’ tax burden in the right way. The following is from Julie Bykowicz and Steven Sloan of Bloomberg:
Republican presidential candidate Mitt Romney donated $7 million to charity in the past two years, more than the $6.2 million the candidate and his wife paid in federal taxes in that period, documents the campaign released show.
Romney and his wife, Ann, who jointly file taxes, gave $1.5 million cash in 2010 and $2.6 million cash in 2011 to the Church of Jesus Christ of Latter-Day Saints, the tax documents show. A former Massachusetts governor whose campaign estimates his fortune at between $190 million and $250 million as co-founder of Boston private-equity firm Bain Capital LLC, Romney is a devout Mormon with deep family ties to the church.
In total, the Romneys donated about 16.4 percent of their adjusted gross income of $42.5 million in the two-year period, according to their 2010 tax returns and an estimate for 2011 taxes. The 2010 return shows $3 million in charitable contributions, and the 2011 estimate shows $4 million.
At first glance, the dollar amount of the Romneys’ charitable giving is “shocking,” Russell James, director of a graduate program in charitable financial planning at Texas Tech University in Lubbock, said in a telephone interview today. “But it’s a different story when you compare it to total wealth. It’s not a shocking amount when you have a quarter- billion dollars in wealth.”
James’s observation strikes me as a bit foolish, given that the Romneys’ have presumably been tithing consistently throughout their adult lives. Had they donated a much smaller share of their income to the LDS Church and to secular charities, they’d presumably have far more private wealth. This is one of the awkward facts about Mitt Romney’s success: given the success of Romney’s peers, like Steven Schwarzman of Blackstone, it is easy to imagine that Romney could have made vastly more money had he decided to “remain in the game” for a longer period of time or had he chosen not to fairly consistently donate more than a tenth of his annual earnings. This is exactly the kind of observation that Romney is congenitally disinclined to make, both because it would come across as obnoxious and because it would be politically toxic.
So Russell James is missing an important part of the story: had Romney decided, in the vein of Bill Gates and other large-scale philanthropists, to give only small amounts to charity until late in life, he may well have had a much large total wealth endowment on reaching his 50s or his 60s.
Many have observed that the effective tax rates paid by John Kerry and his wife Teresa Heinz Kerry was somewhat lower than what Mitt Romney and his wife Ann Romney paid over the last two years. But it seems rather more salient to compare how much the Romneys and the Kerrys kept for their respective families, i.e., income after taxes and after charitable contributions. The Heinz family has devoted a great deal of its wealth to charitable foundations, particularly to causes in and around western Pennsylvania. So perhaps the amounts would be comparable.
There is an obvious objection: after-tax income can be channeled to anything, and charitable giving can be understood as a form of consumption. That, I assume, will remain the reigning interpretation. But another way of thinking about charitable giving is as a reflection of one’s sense of obligation. Some people translate this sense of obligation exclusively through the state: I care about poor people, ergo I think other people should pay higher taxes and I will vote for candidates who might be inclined to raise my taxes. Another approach, however, is to say: I think the government should be subject to spending discipline and also that taxes in some sense represent a diminution of personal freedom, which is why I tend to think of taxes as a necessary evil; yet I also think the fortunate among us should share our good fortune with institutions that are able to take into account considerations of moral character in ways that would actually be inappropriate for the state.
Can someone out there stack up the candidates according to how much they kept for themselves and their families instead of just how much they paid in taxes as such?
In September, I noted the importance of the exploitation of the Utica Shale formation to Ohio’s economic future. In a column published late that month, I identified a potential political wedge:
Once Republicans have a nominee, they’d be wise to press the energy issue to their advantage. In recent weeks, Obama has been firing up the base by promising to eliminate “tax loopholes for oil companies.” Among other things, the Obama administration’s new deficit plan proposes axing a tax code provision that allows energy companies to deduct the expenses of drilling new wells. This would dramatically raise the costs of developing new energy sources in Ohio.
Meanwhile, the president and his allies are touting his clean energy efforts in a new advertisement in an effort to shift the focus away from Solyndra to more politically attractive beneficiaries of subsidized loans. As Maria Galluci reports, there is an ongoing struggle over the expiration of a tax subsidy designed to benefit renewable electricity providers.
The PTC, which was first enacted in 1992, pays wind farm owners 2.2 cents for every kilowatt-hour of electricity they produce during the first decade of operation. In short, its goal is to help wind compete with coal.
The tax credit has expired three times since it was introduced in 1999. And each time, the number of new wind installations plummeted by at least 70 percent compared with the previous year, resulting in major job losses, according to industry estimates.
U.S. wind advocates have lobbied hard over the past few months to extend the PTC, to no avail.
This week, at least, they found a new and powerful ally in President Obama’s Council on Jobs and Competitiveness, a nonpartisan group of nearly 30 business, labor and academic leaders created in 2009 to give Obama advice on how to grow the economy.
On Tuesday, the council presented Obama with its 2011 year-end Roadmap to Renewal report. In it, the leaders emphasized the need to extend production tax credits for energy projects, which they say will “promote the type of innovation and investment America needs to diversify its generation portfolio and prepare for rising levels of energy demand.”
If the PTC is not renewed, a Danish turbine manufacturer is threatening layoffs.
Vestas, the Danish wind turbine maker with a U.S. headquarters in Oregon, said on Jan. 12 that it might have to lay off 1,600 American employees if the PTC for wind power is left to expire on Dec. 31.
That’s on top of the 2,335 positions that Vestas is already cutting worldwide as it battles tough competition from Chinese manufacturers and a global glut of turbines that’s caused prices to drop dramatically. The first round of layoffs—which included 182 U.S. jobs—will help the company slash manufacturing and operating costs by nearly $200 million.
Vestas has spent more than $1 billion to build four wind turbine factories in Colorado, and it employs more than 3,000 people in America. The company doesn’t have any plans right now to shut down its U.S. factories.
However, company officials wouldn’t say how current and possible future job cuts would impact its brand-new, $16 million research facility in Marlborough, Mass. “We don’t know if or how the global restructuring and cost reduction plan will affect the R&D facility in Marlborough,” Andrew Longeteig, communications specialist for Vestas American Wind Technology, told GateHouse News Service.
In a healthy economic environment, one assumes that the shedding of 1,600 would attract relatively little notice. Now, however, decisions on this scale are taken quite seriously, and not just due to the symbolic resonance of green technology.
My sense, however, is that Galluci is understating the challenges to Vestas and firms like it when she attributes difficulties to the global glut of turbines. A deeper problem is, as Julie Johnsson and Marc Chediak have observed, the natural gas glut:
A shale-driven glut of natural gas has cut electricity prices for the U.S. power industry by 50 percent and reduced investment in costlier sources of energy.
With abundant new supplies of gas making it the cheapest option for new power generation, the largest U.S. wind-energy producer, NextEra Energy Inc. (NEE), has shelved plans for new U.S. wind projects next year and Exelon Corp. (EXC) called off plans to expand two nuclear plants. Michigan utility CMS Energy Corp. (CMS) canceled a $2 billion coal plant after deciding it wasn’t financially viable in a time of “low natural-gas prices linked to expanded shale-gas supplies,” according to a company statement.
Mirroring the gas market, wholesale electricity prices have dropped more than 50 percent on average since 2008, and about 10 percent during the fourth quarter of 2011, according to a Jan. 11 research report by Aneesh Prabhu, a New York-based credit analyst with Standard & Poor’s Financial Services LLC. Prices in the west hub of PJM Interconnection LLC, the largest wholesale market in the U.S., declined to about $39 per megawatt hour by December 2011 from $87 in the first quarter of 2008.
Power producers’ profits are deflated by cheap gas because electricity pricing historically has been linked to the gas market. As profit margins shrink from falling prices, more generators are expected to postpone or abandon coal, nuclear and wind projects, decisions that may slow the shift to cleaner forms of energy and shape the industry for decades to come, Mark Pruitt, a Chicago-based independent industry consultant, said in a telephone interview.
Essentially, we’re subsidizing wind turbines so that they can provide an alternative to abundant domestic natural gas. The premise is that wind power is more environmentally sound, yet that calculation might shift if we factor in the carbon-intensity of manufacturing turbines and the value of the land that is used by legacy turbines. (High-altitude wind, i.e., kite power, is a somewhat different story, and the case for subsidizing high-altitude wind is stronger than the case for subsidizing mature turbine technologies, though it’s certainly not rock-solid.)
To be sure, we want to have a diverse, resilient electricity supply. There is a danger in excessive reliance on natural gas: consumers will be more exposed to sharp increases in natural gas prices, most obviously. The question, however, is whether subsidizing traditional wind turbines is the right strategy, or if we’d be better served by investing in something else entirely. The dilemma facing nuclear power, including small and medium-sized reactors, is that it is so capital-intensive relative to the available alternatives.
To return to the politics for a moment, it seems pretty clear that the center-right should emphasize the production of cheap and abundant domestic energy. It helps improve the balance of trade, it may generate some nontrivial number of “brown jobs,” and the gains will likely be concentrated in relatively depressed regions. Skepticism towards the oil and gas industry is deeply ingrained in America’s center-left coalition, in part because the political balance in the energy industry has tended to tilt right, with the exception of Henry Kaiser and a handful of others. Moreover, the environmental movement has tended to be antagonistic towards the interests of marginal energy producers, often in unwitting alliance with the inframarginal energy producers. So it seems likely that the president won’t suddenly about-face on expensing, etc. This will be a fruitful issue in the months to come.
My latest column for The Daily is an extended discussion of Arnold Kling’s scenario for how a U.S. sovereign debt crisis might play out. The following is from Kling’s provocative new essay:
Let us consider how this would play out in the event of a loss of confidence in the ability of the U.S. to meet its obligations. Under such a scenario, the hole in the U.S. budget is likely to be too large to be filled by an IMF loan. Consequently, creditors will be in a weak negotiating position. If the U.S. government is deadlocked (for example, with different branches of government controlled by different parties and strong partisan divisions, as now, going into the 2012 election), it will be in a strong negotiating position. That is, an IMF proposal for austerity that is too severe may stand little chance of being enacted.
If creditors are in a weak position and the government is in a strong position, then it becomes likely that a negotiated agreement will include some form of debt restructuring. The IMF will force as much austerity on the U.S. fiscal system as the political realities will allow, and the rest of the fiscal gap will be closed by a negotiated default.
It would seem reasonable to suppose that the U.S. would give up some of its sovereignty in the event of default. That is, in order to be able to resume borrowing in international credit markets, the U.S. would have to agree to IMF conditions going forward. The content of those conditions would be determined by the key lending countries. So, for example, if China wanted the United States to reduce defense spending as a condition for continued lending, the IMF would require lower defense spending as part of the negotiated default agreement.
Indeed, much of global politics and economics would be altered by a negotiated default. United States Treasury securities would lose the status of a “safe haven” asset and the dollar would lose its status as a reserve currency. International investors would seek out some alternative. That might involve gold or real estate or the financial claims issued by other countries. It is difficult to forecast what such a world would be like, other than it would be quite different from the world we live in today. [Emphasis added]
At the risk of coming across as a fear-mongering reactionary, I’d like to draw your attention to the highlighted passage. This is what Indiana Gov. Mitch Daniels meant when he described mounting debt levels as a “survival-level threat to the America we’ve known.”
Newt Gingrich’s rise is predicated on the belief that he will never compromise with his political enemies. Yet it is also hard to imagine Gingrich charming or cajoling his political enemies into moving in his direction. It is not difficult to imagine that Gingrich’s approach to governance will accelerate the timetable Kling describes.
Editor’s note: As it turns out, Scott Winship’s observations regarding Alan Krueger’s mobility claims has attracted considerable attention, not all of it favorable. Below, Scott offers some closing thoughts. Thanks to Scott for enriching our conversation on these issues. I’ve learned a great deal from the exchange, both about the underlying issues and about the discursive styles of the various interlocutors.
Several researchers have misinterpreted my point in criticizing Krueger’s mobility claims from last week. Here it is, stated as clearly as I can muster: Krueger was deceitful in his claim that the middle class is shrinking, and the Great Gatsby Curve is remarkably weak evidence that mobility is declining.
Let me start with the second objection to the Krueger claims, related to the now-famous Great Gatsby Curve. My assessment has been the subject of quite a bit of criticism from Miles Corak, my Brookings colleague Justin Wolfers and others. Miles and Justin basically accuse me of not knowing my stuff, making arguments that weaken my own casse, and trying to muddy up Krueger’s evidence indiscriminately to cast doubt on it. Harsh, Heather.
To review, Krueger plotted inequality against immobility across ten countries, computed the best-fitting line through the points, and then used this Great Gatsby Curve to estimate that today’s children will have less mobility than their predecessors. I want to emphasize for the record that I am agnostic on the questions of whether economic inequality robustly correlates with economic imobility across nations and whether economic inequality causes economic immobility. What I did assert in my critique of Krueger’s figures is that for purposes of projecting whether mobility is on the decline or not, extrapolations using the Great Gatsby Curve are “uninformative”. The approach is an exceedingly weak one, which replaced the even-more-flawed approach from the president’s Osawatomie speech. The specific way that Krueger implemented the approach also has specific weaknesses (such as using inequality measured in adulthood rather than in childhood).
Justin made the colorful charge that my criticisms of the Gatsby Chart’s imprecision actually strengthen Krueger’s and Corak’s case. Wolfers apparently thinks I am arguing that all or some of the ten points in the Gatsby Chart are measured imprecisely, such that they are equally likely to be too high or too low, too far left or too far right. He also appears to think that I am arguing that the perfectly estimated best-fitting line would be flat, indicating no relationship between inequality and immobility.
If I were arguing both of these points simultaneously, I would indeed be inadvertently strengthening the other side’s case. This would be embarrassing. Since I am actually making neither argument, it is just frustrating, since most of Justin’s readers will assume he is right and will not end up reading this post. So to be clear, I am arguing that the Gatsby Curve is too imprecise for worthwhile estimates of the trend in American mobility. It may be too flat (if most of the error in the points is of the equally-likely-to-be-high-low-left-right variety). But it may be too steep. Many of the issues I have raised do not necessarily imply that the Gatsby Curve is too steep—Justin is just wrong about this.
Let me illustrate dramatically with two examples. The economic theory that Miles cites regarding why inequality might affect mobility is most logically applied using wealth inequality data rather than income inequality data. For five countries where there are comparable wealth Gini coefficients (see Table 3), the Gatsby Curve (using Miles’s immobility figures and the wealth Ginis from roughly 2000) really is flat. The correlation is 0.01, while the correlation using income Ginis from roughly 2000 is 0.64. (Ask me if you want the spreadsheet.)
For another illustration of how imprecise Gatsby Curves are for this sort of exercise, take a look at the last three rows of Jo Blanden’s Table 5. The rows provide 18 estimates of mobility-inequality correlations, using 6 different sets of mobility estimates and 3 different income Ginis. If Miles and Justin are right, these 18 estimates should be similar. But they instead range from -0.15 to 0.87. That is to say, the Gatsby Curves are all over the place. (And, yes, I realize that the Ginis are measured at different times, but as I noted, Krueger is using Ginis for the wrong time (adulthood instead of childhood). Miles and others have not found this objection compelling up to this point.)
If the Administration wants to say, “There is a relationship across countries between inequality and mobility, so that would lead us to expect that with rising inequality there will be less mobility,” that’s less objectionable, in a sense, than trying to nail down a point using the Great Gatsby Curve, giving the illusion of precision. However, the claim would still be weak, for a number of the reasons I have laid out. Better yet would be to just say, we have too little mobility and to support it with the comparatively rock-solid evidence on levels of American mobility. That is, one does not have to tie insufficient mobility to inequality, and one does not have to show that mobility is declining to argue that it is insufficiently high.
Noah Smith is the only person who has attempted to defend Krueger’s claim that the middle class has shrunk, which obscured the point that it has shrunk by his definition because more people are now richer than middle class. Noah claims that this claim isn’t deceptive at all, that it is narrowly true and illustrates a point about rising inequality. Brad DeLong gleefully approves.
Give Noah the point that in a narrow sense, the middle class as Krueger defines it has shrunk. Was Krueger being deceitful? Summarizing the chart that showed a declining middle class, he said, “we have more families falling into either extreme end of the distribution, and fewer in the middle.” No—we have more families falling into one extreme end, and it is not the low end, it is the high end. For that matter, the upward mobility estimates from the Osawatomie speeech used the same constricted definition of middle class: upward mobility from poverty to richer-than-middle class did not count as upward mobility in those estimates. There is absolutely no reason to be substantively concerned about whether the poor have less oportunity to make it to the middle class but no further.
I hope readers have found this debate to be informative, and I am grateful to Reihan for letting me crash here for a few days. I have spent too much time on it this week to continue, barring some response that I feel compelled to defend myself against. I share Justin’s hopes that the Gatsby Curve will spark a lot of additional research on this question—I’ll certainly be pursuing some of it.
Brad Plumer, drawing on the work of Jared Bernstein, seems to suggest that plotting period by period capital gains tax rates against investment levels tells us something meaningful about the causal relationship between the two. More specifically, he says:
Jared Bernstein, on the other hand, brings the graph to suggest that there’s never been a clear relationship between the capital gains tax rate and investment.
Is a clear relationship the same thing as a causal relationship? Or might a clear relationship actually reflect confounding variables, thus creating a misleading impression? One wonders if we can apply this logic across the board, i.e., only “clear relationships” of the kind Bernstein identifies will demonstrate the value of a given spending initiative. This approach would have interesting, and potentially problematic, implications for public policy.
Plumer quotes a number of scholars, including Tyler Cowen, who suggest that the capital gains tax rate matters very little. Cowen goes so far as to suggest that a belief that capital gains taxes have a significant impact on future investment levels is a “great myth.”
There are, however, other views on this question. Greg Mankiw and Matthew Weinzierl offer a stylized model in which reductions in capital gains taxes are partly self-financing:
The neoclassical model yields particularly simple expressions for steady-statefeedback effects, but it is also important to consider the transition path to the steady state. We therefore consider a log-linearized version of the model for the special case of unitary intertemporal elasticity of substitution. For our canonical parameter values, we find that the immediate revenue feedback effects are quite similar for capital and labor taxes: slightly more than 10 percent of a tax cut immediately pays for itself through higher labor supply and national income. For both types of taxes, the feedbacks grow over time toward their steady-state values, with the feedback for a capital tax cut reaching halfway after about ten years.
That is, “growth pays for 50 percent of a capital income tax cut in the steady state.”
Mathias Trabandt and Harald Uhlig build on the work of Mankiw and Weinzierl, and they pursue a dynamic scoring exercise to determine how much of a cut in labor income vs. capital income is self-financing:
We find that for the US model 32% of a labor tax cut and 51% of a capital tax cut are self-financing in the steady state. In the EU-14 economy 54% of a labor tax cut and 79% of a capital tax cut are self-financing.
Trabandt and Uhlig offer another way of thinking about taxes on labor income vs. capital income: how close are various market democracies to the point of diminishing returns, i.e., how many are past the point on the Laffer Curve at which higher taxes actually lead to revenue decreases rather than increases?
For the benchmark calibration with a Frisch elasticity of 1 and an intertemporal elasticity of substitution of 0.5, the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes, while the same numbers for the EU-14 are 8% and 1%.
To provide this analysis requires values for the tax rates on labor, capital and consumption. Following Mendoza, Razin, and Tesar (1994), we calculate new data for these tax rates in the US and individual EU-14 countries for 1995 to 2007. Denmark and Sweden are on the “wrong” side of the Laffer curve for capital income taxation. By contrast, e.g. Germany could raise 10% more tax revenues by raising labor taxes but only 2% by raising capital taxes. The same numbers for e.g. France are 5% and 0%, for Italy 4% and 0% and for Spain 13% and 2%.
We show that the fiscal effect is indirect: by cutting capital income taxes, the biggest contribution to total tax receipts comes from an increase in labor income taxation. We show that lowering the capital income tax as well as raising the labor income tax results in higher tax revenue in both the US and the EU-14, i.e. in terms of a “Laffer hill”, both the US and the EU-14 are on the wrong side of the peak with respect to their capital tax rates.
If Trabandt and Uhlig are right and Cowen and Bernstein are wrong about capital gains taxes, the consequences for growth could be very significant. Denmark and Sweden are, according to this framework, growing despite their level of capital income taxation, not because capital income taxation has no impact or a negligible impact.
This obviously doesn’t settle the underlying dispute. But if skepticism is warranted in the case of “clear relationships” (i.e., crude period by period correlations) in some domains, it seems profoundly unwise to assign them great significance in others.
More recently, Tyler Cowen has offered nuanced thoughts and helpful links on the subject of capital income taxation:
Here is one example: we can only improve our quality of life by keeping the most violent criminals off the streets. So, I ask you to approve my bail reform package, which would mirror the federal system. It would keep offenders with a history of violence who are a danger to our communities in jail until the time of their trial, instead of releasing them into society to prey on the public.
This may require a constitutional amendment but it is reform that is long overdue. Do you know that if a person is arrested with a long record of violence we cannot detain that person in jail pending trial? We must release that person, regardless of how dangerous they are to potential witnesses against them or innocent members of our society. Let us amend our bail laws to allow judges to consider the factor of dangerousness to our communities before we release a violent person back on to the street to maim or kill while they await trial. This, too, is just simple common sense.
At the same time, let us reclaim the lives of those drug offenders who have not committed a violent crime. By investing time and money in drug treatment – in an in-house, secure facility – rather than putting them in prison.
Experience has shown that treating non-violent drug offenders is two-thirds less expensive than housing them in prison. And more importantly – as long as they have not violently victimized society – everyone deserves a second chance, because no life is disposable.
I am not satisfied to have this as merely a pilot project; I am calling for a transformation of the way we deal with drug abuse and incarceration in every corner of New Jersey.
So today I ask this Legislature and the Chief Justice to join me in this commitment that no life is disposable.
I propose mandatory treatment for every non-violent offender with a drug abuse problem in New Jersey, not just a select few. It will send a clear message to those who have fallen victim to the disease of drug abuse – we want to help you, not throw you away. We will require you to get treatment. Your life has value. Every one of God’s creations can be redeemed. Everyone deserves a second chance. [Emphasis added]
I want all politicians, and in particular all conservatives, to pay careful attention to this: Christie highlighted a dangerous gap in the system that limits the discretion of judges to keep violent offenders behind bars. Yet he also made the case that nonviolent drug offenders should be given treatment rather than imprisoned because (1) it is cost-effective, (2) it is decent and humane, and (3) it recognizes that we can’t afford to waste human potential.
By leading with a “punitive” strategy (actually, a commonsense strategy — it’s about preserving discretion) and then pivoting to a measure that will help members of a marginalized population, Christie demonstrates his political sophistication, his strategic vision, his guts, and his decency. This is a big deal. Watch it for yourself below:
There’s another dimension to this: Christie evidently doesn’t believe that taking this stand will limit his political future. He is demonstrating that his brand of conservatism can form the foundation of a coalition that captures centrist voters even in a heavily urban, diverse northeastern state. This is part of why I understand and accept why Christie chose not to run for president this cycle: he had much more to do in New Jersey, and building a solid foundation there could be a great help if he does indeed pursue a national career.
Recently, Aaron Carroll, a health economist, suggested parenthetically that means-testing Medicare “won’t do much for the bottom line.”
It’s worth observing that there is more than one bottom line. For example, policymakers might be concerned about whether social transfers redistribute primarily to the poor or primarily to the relatively affluent. This is an issue to which the House Budget Committee’s Republican staffers have drawn attention, and rightfully so:
[T]he distribution of government transfers has moved away from households in the lower part of the income scale. For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers.
This shift reflects a growth in programs that focus on the elderly population and are not for the most part income-adjusted, such as Social Security and Medicare. In other words, the structure of some of the nation’s largest entitlement programs has decreased the share of government transfer payments going tolower-income households and directed an increasing share of government spending to wealthier seniors. According to the CBO’s findings, this trend, accelerated by the retirement of the baby-boom generation, contributes to an increase in inequality. [Emphasis added]
Advocates of the expansion of social transfers to the non-poor will presumably see these issues somewhat differently, a subject to which we’ll return.
Note that means-testing in the context of premium support could make a significant difference when it comes to mitigating inequality, as premium support could vary according to lifetime average income. For example, the federal government could offer enough premium support to pay the second-lowest bid to deliver a defined benefit for the all seniors but those with lifetime average incomes that placed them in, say, the top 15% of the distribution. Those individuals would receive a somewhat reduced amount of premium support. This might not lead to dramatic cost savings, but one suspects that many Americans would consider this a fairer approach.
One reason lump-sum unemployment benefits are attractive is that they don’t punish workers for finding new jobs relatively quickly. Yet lump-sum payments also give workers the freedom to take a longer amount of time to find more remunerative or engaging work. Among other things, a lump-sum payment could facilitate relocation to a more promising labor market, or it could be used to make an investment in training, etc. (See Raj Chetty’s “Moral Hazard vs. Liquidity and Optimal Unemployment Insurance.”)
The growing number of Americans receiving SNAP payments has become a source of political controversy. Yet what many fail to recognize is that, as Casey Mulligan observes, eligibility standards for SNAP have been relaxed; specifically, asset limits have in many cases been waived. There are perfectly valid reasons to pursue this strategy, e.g., in light of deleveraging across the economy, perhaps we don’t want families with low levels of net income to draw down their savings to pay for food; relaxing or suspending asset limits may reduce SNAP’s administrative burden, etc. Regardless, we’re not dealing with an apples-to-apples comparison when we consider SNAP eligibility before and after the 2008 crisis.
Though I don’t share David Frum and Matt Yglesias’s enthusiasm for a carbon tax, they remind us of why the idea isn’t about to fade away.
Frum offers the following as part of his case for a carbon tax:
Higher prices since 2006 have again changed behaviour. Americans are driving fewer miles. They are retiring more cars than they buy. They are opting again for smaller, fuel-efficient vehicles. They are buying smaller homes, with a new emphasis on central city living. The recession has of course intensified all these trends.
They won’t become ingrained, however, until and unless Americans accept that oil prices will remain high indefinitely. Which, in turn, means until and unless the United States adopts some system of standby energy taxes or carbon taxes.
My own view is that encouraging the embrace of pay-as-you-drive automobile insurance would deliver the same benefits (a) while reducing costs rather than raising them for the vast majority of motorists and (b) without creating a large new revenue source. Suffice it to say, some will consider (b) a disadvantage. I’d caution environmentalists to recognize, per Monica Prasad, that creating a new carbon-based revenue source might undermine efforts to reduce carbon emissions:
How do you get them to change? First, you prevent policy makers from turning the tax into a cash cow. Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. Reduce the income tax? Give the money to low-income consumers? Use it to pay for health care? Everyone seems to forget that the amount of revenue is directly tied to the amount of pollution that is still going on.
And of course our feelings about (b) will reflect our larger beliefs concerning whether we should emphasize large federal revenue increases as a share of GDP over the business cycle or greater spending and organizational discipline in government in our efforts to achieve fiscal sustainability.
