Thursday, September 22, 2016

Why Does Big Business Fear Trump?

It is not surprising that there is little love for Donald Trump’s presidential candidacy among the leaders of top US multinational corporations. Why then, asks Andrew Ross Sorkin of the New York Times, do they not speak out? Why do they quickly follow up their private comments with, “I could never say that on the record”? I find some of the views reflected in Sorkin’s article disturbing.

The attitudes of top executives would be more understandable if they centered on the issue of free trade, but they do not. Yes, big business has profited from past trade deals and backs new ones like the TPP and TTIP, which Trump promises to cancel. But Trump’s Democratic opponent and a majority of Congressional candidates from both parties have also joined the anti-trade bandwagon, so trade policy is in for a change no matter who wins this election. As Trump himself would say, there’s something else going on.

Trump the bully is one broader fear of the executive class. Sorkin quotes Reid Hoffman, co-founder of LinkedIn, who was one of the few willing to speak to him on the record:
People are fearful that, especially in a circumstance where he might be in a position of extreme power as a potential presidential candidate, that would be used in a retaliatory way, that would be used in vengeful way. Everyone gets worried about being attacked, and part of the logic and mechanics of bullies is that they cause people to be fearful that they’ll be singled out and attacked.
It’s the same thing like on school grounds, when people won’t go help the kid who is being bullied because they’re worried that the bully will focus on them.
Yes, it is frightening to think about the ways a thin-skinned and vengeful President might misuse the office. The entanglement of corporations with government is such that there would be many opportunities to punish enemies. Taxes, regulations, and government contracts would be some of the most direct, but backdoor methods like planting rumors or leaking documents might be easier, and just as damaging. A President Trump might install a compliant security chief who would give him access to a company’s internal phone and email communications, encrypted or not. The tools at the disposal of a spiteful president would make something like closing a bridge look like a playground prank.

Friday, September 9, 2016

How Hillary Clinton's Social Policies Could Raise Effective Marginal Tax Rates for the Middle Class

Hillary Clinton is often said to be a policy wonk, deeply enmeshed in specifics and details, but that may be a mischaracterization. In some ways, her approach seems disturbingly superficial, skipping one perceived problem to another with little attention to their underlying causes. In some cases, Clinton seems to have paid little attention to the unintended consequences of her proposals, as a real policy expert would do. A look at the tax implications of some of her social policy proposals will illustrate these shortcomings.

How progressive? Nominal vs. effective tax rates

Discussions of by both supporters and critics have characterized Hillary Clinton’s tax policies as progressive. The appearance of progressivity arises from her pledge to raise tax rates and close loopholes for the wealthiest Americans, while leaving nominal tax rates for middle-class families largely unchanged. According to an analysis by the Tax Policy Center, her proposals would increase revenue by $1.1 trillion over the next decade, with nearly all of the tax increases falling on the top 1 percent.

However, the conclusion that Clinton’s policies would have little effect on middle-class families is based on a narrow view of taxes—one that takes into account only the money that taxpayers hand over to the IRS. Economists have long favored a broader concept called the effective marginal tax rate (EMTR), which includes reductions in government benefits that occur as income rises as well as increases in taxes paid. Some little-noticed features of Clinton’s education and healthcare policies would have the unintended consequence of raising effective marginal tax rates on middle-class families to levels far above those that top earners would face.

Wednesday, August 31, 2016

How Occupational Licensing Undermines Labor Fluidity, and Who is to Blame

A healthy economy requires a fluid labor market. Even when total employment and output are stable, the labor market is in constant motion. Jobs disappear when firms close or downsize. Other jobs appear when new firms open or old ones expand. People move freely from one job to another in search of career advancement or better fit between their work and their personal lives.

Unfortunately, the US labor market is becoming less fluid. We can trace part of the decrease in fluidity to outside factors like an aging labor force and changing business practices, but much of it stems from ill-considered labor market policies. Of these, one of the most damaging is the spread of occupational licensing over recent decades. As we will see, Democrats and Republicans share the blame.

How can we measure labor fluidity and why do we care?

A paper by Stephen J. Davis of the University of Chicago and John Haltiwanger of the University of Maryland  charts the decline in US labor market fluidity. Using data on quits, layoffs, and job openings from the Bureau of Labor Statistics, supplemented by other data sources, the authors construct three fluidity indicators:
  • The job reallocation rate is the sum of the number of jobs created at new and expanding firms each calendar quarter and jobs destroyed at firms that close or downsize. Newly created jobs include both those that are immediately filled and job openings that become newly available but not yet filled.
  • The worker reallocation rate is the sum of the number of hires, quits, and layoffs. It includes people who move directly from one job to another; those who move from a job into unemployment or out of unemployment into a job; those who leave a job and, at the same time, leave the labor force; and those who enter the labor force and immediately take a job.
  • Churning is the amount by which the worker reallocation rate exceeds the job reallocation rate. If people changed jobs only when their current job disappeared and took only newly created jobs, the rate of churning would be zero. The rate of churning, then, represents job changes that are motivated by career advancement opportunities or personal choices, rather than forced by job creation or destruction.
The following chart from Davis and Haltiwanger shows that all three measures of fluidity have been decreasing in the United States. Their paper includes many more charts showing decreases in other measures of fluidity, decreases in underlying indicators like quits and hires, and decreases by state and demographic group. The decreases in fluidity have been widespread, but they appear to have affected men more than women and less educated workers more than those with college educations. Key aspects of the decline in labor fluidity appear to be unique to the United States, or at least more pronounced here than in other advanced economies.

Monday, May 23, 2016

What Does the Unemployment Rate Measure? Labor Market Slack or the Social Stress of Joblessness? Why Does it Matter?

The unemployment rate published monthly by the Bureau of Labor Statistics is one of the most widely watched of all economic indicators. But why? What does it really measure?

The news media, politicians, and voters tend to see the unemployment rate as an index of the social stress of joblessness. There is ample evidence to support that view. Researchers have linked high unemployment rates to increased mortality and impaired mental health. A recent cross-sectional analysis shows a strong relationship between unemployment  and suicide. There is evidence that unemployment undermines personal relationships, although the impact on divorce rates is ambiguous: A weak job market can break up some couples while leaving others stuck in bad marriages because they can’t afford divorce. Rising unemployment is also associated with higher crime rates, for both violent and property crimes. There is even something called the misery index, which is the sum of the unemployment rate and the inflation rate.

Economists, on the other hand, more often view the unemployment rate as an indicator of economic slack. People who want to work but are not working are a wasted resource. Finding jobs for them would add to GDP. Monetary and fiscal policymakers watch employment indicators closely because the more slack there is in the labor market, the more room there is for economic stimulus without risk of inflation.
The questions we need to address, then, are, first, can the standard unemployment rate do double duty as an indicator of both macroeconomic slack and social stress? And if not, what might be better?

Thursday, April 28, 2016

The Social Safety Net and Work Incentives: Conservative and Progressive Views

One of the most common criticisms of social safety net programs is that they discourage work. As House Speaker Paul Ryan has put it, they risk becoming a “hammock that lulls able-bodied people to lives of dependency and complacency,  that drains them of their will and their incentive to make the most of their lives.”

It is not hard to find examples in which the threat to work incentives is real. Not long ago, in a post on labor market adjustments to trade shocks, I cited a recent report from the Congressional Budget Office, according to which taxes and benefit reductions can claw back as much as 80 percent of each dollar of additional income earned by households whose income is just above the poverty level.

A few days later, however, a reader called my attention to a paper, “It Pays to Work: Work Incentives and the Safety Net,” by Isaac Schapiro and colleagues at the Center on Budget and Policy Priorities. The CBPP team uses the very same CBO data to support the opposite conclusion:
Some critics of various low-income assistance programs argue that the safety net discourages work.  In particular, they contend that people receiving assistance from these programs can receive more, or nearly as much, from not working — and receiving government aid — than from working. Or they argue that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains.
Careful analysis of the data and research demonstrates, however, that such charges are largely incorrect and that it pays to work.
What is going on here? How can it be that the same data support both the view that the social safety net discourages work, and that it does not?

Monday, April 11, 2016

Inversions Strengthen the Progressive Case for Abolishing the Corporate Income Tax

The Obama administration has taken off the gloves in its war on runaway corporations. On April 4, theTreasury released a new set of rules designed to curb “inversions,” a strategy in which a US company cuts its corporate tax burden by merging with a foreign company and moving its official tax residence out of the United States. The pharmaceutical giants Pfizer and Allergan immediately announced that they would abandon their pending mega-billion inversion deal.

The new rules are a change in policy for the administration. At one time, President Obama saw the US corporate tax code as needing deep reform, not stronger enforcement. In his 2011 State of the Union Address, he said:
Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries.  Those with accountants or lawyers to work the system can end up paying no taxes at all.  But all the rest are hit with one of the highest corporate tax rates in the world.  It makes no sense, and it has to change.
So tonight, I’m asking Democrats and Republicans to simplify the system.  Get rid of the loopholes.  Level the playing field.  And use the savings to lower the corporate tax rate for the first time in twenty-five years—without adding to our deficit.  It can be done.
It could have been done, but it wasn’t. Now, instead, Obama seems have adopted the views of progressive icon Senator Elizabeth Warren, as expressed in a speech last November, reported on the progressive website Common Dreams. Warren disagreed with the contention that corporate taxes are too high. She urged Treasury Secretary Jack Lew, who was already working on the new rules, to be sure they were written in a way that increased the amount of taxes that corporations pay:
When I look at the details, I see the same rigged game, a game where Congress hands out billions in benefits to well-connected corporations, while people who really could use a break. . . are left holding the bag.
Only one problem with the over-taxation story: It’s not true. There is a problem with the corporate tax code, but that isn't it. It's not that taxes are far too high for giant corporations, as the lobbyists claim. No, the problem is that the revenue generated from corporate taxes is far too low.
In my opinion, the Obama of 2011 was right, while Warren, and the Obama of 2016, are wrong. Here is why real corporate tax reform—preferably the complete abolition of the corporate income tax—is a cause that progressives should embrace as enthusiastically as do conservatives.

Monday, April 4, 2016

How Reform of the Social Safety Net Could Mitigate the High Costs of Trade Adjustment: A Response to Autor et al.

The two most watched candidates of this presidential election season, Donald Trump and Bernie Sanders, have put anger over the effects of free trade at the center of their campaigns. In doing so, they have won millions of votes.

Many of the arguments they use in their stump speeches are overly simplistic, but the anger is real. And, as Eduardo Porter noted recently, angry voters have a point: New research suggests that economists have long understated the costs of trade and underestimated the time required for the economy to adjust to the trade shocks that rapid growth of both US imports and exports have produced.

If that research is correct, if free trade really causes more pain than we thought, what is the right policy response? Not protectionism, in my opinion, but there are measures we could and should take to ease the pain. Read on.

What the New Research Seems to Show

Jared Bernstein, a Senior Fellow at the Center for Budget and Policy Priorities, points out that how we assess the balance between the costs and benefits of trade depends on whether we view people as consumers or as workers.

Consumers benefit from free trade through lower prices and access to a wider variety of products. The impact on workers is more complex. Some lose jobs at factories that can no longer compete with imports. Waiters at local restaurants lose income when unemployed factory workers stop taking their families out to dinner. At the same time, new jobs open up as trade expands employment in export industries, and as lower prices of imported goods leave consumers with extra money to spend on local goods and services.

The impact on workers depends to a large extent on whether those who lose their jobs to import competition can find their way to the new jobs created elsewhere. To take an example from my last post, suppose consumers save $1.1 billion from cheaper imported tires at the cost of 1,200 jobs lost in the tire industry. At more than $800,000 in gains to consumers per job lost, that sounds like a huge net gain for the economy as a whole. But is it a net gain for Joe, the tire worker? Not unless he quickly finds a new job as good, or nearly as good, as the one he lost.