05 April 2014

Links of the Week - 4 April 2014

A weekly collection of links from the Conscience Warrior Newsfeed

There are almost as many payday lenders as McDonald’s and Starbucks. No, really
Danielle Douglas

Payday loans aren’t the problem. The problem is poverty.
Lydia DePillis

Violence Vouchers: A Descriptive Account of Property
Matt Bruenig

What I Mean When I Talk About IS-LM
Paul Krugman

Video: Robert Shiller on Market Bubbles – And Busts
via Mark Thoma

Sacred and Profane: How not to negotiate with believers
Malcolm Gladwell

Why Whites Support Capital Punishment
Jamelle Bouie

The Top of the World, A Review of Capital in the Twenty-First Century
Doug Henwood

Obamacare, The Unknown Ideal
Paul Krugman

Trickle-up Economics
David Cay Johnston

01 April 2014

Happy April, part two

A Case for Lower Top Marginal Tax Rates

There has been much discussion in the popular press in the last few years about economic growth and income inequality. Some economists and commentators have suggested that inequality is a barrier to economic growth (Plumer, 2013). In Kuznets’ canonical formulation, inequality rises as per-capita income rises from low levels, but begins to fall as per-capita income rises yet further (Figure 1) (Kuznets, 1955). The argument of those who believe inequality and growth are incompatible is both that the United States economy is on the “right-hand side” of the Kuznets Curve, and that there is a causal relationship that runs from inequality to growth. Evidence, however, suggests that reducing the marginal tax rates for the top three brackets (currently 33, 35, and 39.6 percent) would increase gross domestic product (GDP). The primary channel for this increase is the labor supply. Numerous studies indicate that reducing top rates would incentivize workers to work more and for non-participants to enter the labor force. For these reasons, I recommend a reduction in the top three marginal income tax rates.

Barro and Redlick find that marginal tax rate increases negatively impact GDP significantly. They found a tax multiplier of approximately 1.1. While this value is unlikely to be robust for marginal rates significantly different from current rates, the 1.1 value is likely to hold for a decrease in rates as well. Barro and Redlick also argue that a decrease in aggregate taxes has a higher multiplier, and therefore a greater stimulative effect, than increases in government purchases, for which the multiplier is less than one (Barro & Redlick, 2011).

The 1986 Tax Reform Act (TRA), which greatly reduced the top rates, provides a natural experiment that has been studied by many researchers. Evans and Kenward estimate that labor supply would increase by 3 percent, leading to a rise in output of 2 percent (Evans & Kenward, 1988). Though they attribute some of the increase in labor supply to the entrance of women into the labor force, a similar effect could be observed today in the reversal of the downward trend in labor-force participation, which has been falling since the mid 1990s, and falling precipitously since 2008 (Figure 2).

Feldstein’s panel study of the TRA finds that individuals’ response to this reduction included increasing labor supply (Feldstein, 1995). This response to altered incentives will lead to an increase in GDP if aggregate supply can be approximated with a Cobb-Douglas production function (Bao Hong, 2008). Feldstein also points out that lower marginal rates encourage workers to take less of their compensation in the form of untaxed perquisites (Feldstein, 1995). This shift toward pecuniary compensation likely reduces deadweight loss, as workers can more directly satisfy their needs and desires with money wages than with non-wage benefits.

Heim’s panel study of the 2001 and 2003 tax law changes, which also reduced marginal rates on higher earners, mirrors Feldstein’s findings. Heim found positive labor-supply effects, especially among those with incomes above $500,000 per year. Like Feldstein’s, Heim’s results imply that reversing the reductions would not likely increase revenue, because workers whose taxes return to higher levels are more likely to work less than to continue working the same amount (Heim, 2009). It is important to note that the period covered by Heim’s study, 1999-2005, included a recession and subsequent recovery. It is therefore possible that his findings are specifically relevant to current conditions. Further supporting the results of Feldstein and Heim, McDaniel finds, in a study of fifteen OECD countries over the period 1960-2004, that 80 percent of changes in hours worked is attributable to changes in tax rates, with the relationship between hours worked and tax rates always negative (McDaniel, 2011).

Arnold, et al. find that replacing income tax revenue with revenue from consumption taxes is beneficial to economic growth. These consumption taxes could take the form of value-added taxes and targeted taxes aimed at reducing environmentally damaging consumption. They specifically cite sales tax reductions as growth-inhibiting. They find that reductions in the top rates would spur productivity growth and entrepreneurship. They specifically cite the progressivity of personal income taxes as a barrier to growth (Arnold, et al., 2011).

At a time when labor-force participation is falling, it is sound policy to incentivize workers to remain in or enter the labor force. Many studies have shown the efficacy of lower marginal income tax rates in achieving this goal. Further, the effect is most prominent on the highest earners. For this reason, I advocate a reduction of the top three marginal income tax brackets.

Figures

Figure 1: Theoretical Kuznets Curve (as described in (Kuznets, 1955))

Figure 2: Labor Force Participation 1993-2014 (Federal Reserve Bank of St. Louis, 2014)

Works Cited

Arnold, J. M., Brys, B., Heady, C., Johansson, A., Schwellnus, C., & Vartia, L. (2011). Tax Policy for Economic Recovery and Growth. The Economic Journal, F59-F80.

Bao Hong, T. (2008, November 20). Cobb-Douglas Production Function. Retrieved February 2, 2014, from João Luís Morais Amador: http://docentes.fe.unl.pt/~jamador/Macro/cobb-douglas.pdf

Barro, R. J., & Redlick, C. J. (2011). Macroeconomic Effects From Government Purchases and Taxes. The Quarterly Journal of Economics, 51-102.

Evans, O., & Kenward, L. (1988). Macroeconomic Effects of Tax Reform in the United States. Staff Papers - International Monetary Fund, 141-165.

Federal Reserve Bank of St. Louis. (2014, February 2). Civilian Labor Force Participation Rate (CIVPART). Retrieved February 2, 2014, from Federal Reserve Economic Data: http://research.stlouisfed.org/fred2/series/CIVPART

Feldstein, M. (1995). The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act. Journal of Political Economy, 551-572.

Heim, B. T. (2009). The Effect of Recent Tax Changes on Taxable Income: Evidence from a New Panel of Tax Returns. Journal of Policy Analysis and Management, 147-163.

Kuznets, S. (1955). Economic Growth and Income Inequality. The American Economic Review, 1-30.

McDaniel, C. (2011). Forces Shaping Hours Worked in the OECD, 1960-2004. American Economic Journal: Macroeconomics, 27-52.

Plumer, B. (2013, December 5). Is inequality bad for economic growth? Retrieved from Wonkblog: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/05/is-inequality-bad-for-economic-growth/

Happy April!

29 March 2014

27 March 2014

Roundup of Arguments Contra-Piketty

Probably still too early for good, sound rebuttals to Capital in the Twenty-First Century, but, until we get one of those, have a look-see at this stuff:

Arnold Kling doesn't understand, because he thinks the premise is impossible because, well, he never quite says...

Will Wilkinson just doesn't want to talk about it.

Robin Hanson sees invisible taxes.

Tyler Cowen promises he'll have more to say later, and his readers say "THEFT! OMG!!"

Any more found will be added to this list. If you have one, leave it in the comments and I will add it on.

[Cross posted at the Newsfeed]

22 March 2014

Links of the Week - 21 March 2014

A weekly collection of links from the Conscience Warrior Newsfeed

An Assessment of the Effectiveness of Anti-Poverty Programs in the United States
Yonatan Ben-Shalom, Robert A. Moffitt, and John Karl Scholz

Redistribution, inequality, and sustainable growth: Reconsidering the evidence
Jonathan D Ostry, Andrew Berg, and Charalambos Tsangarides

How macro answered its critics
Noah Smith

What the collapse of the Ming Dynasty can tell us about American decline
Noah Smith

Redistribution and the Lesser Depression
Paul Krugman

Avoiding the cost of needless fear
Cass Sunstein

America’s Long and Productive History of Class Warfare
Justin Fox

Inequality in Capitalist Systems Is Not Inevitable
Mark Thoma

Whose Economy You Talkin’ About?!
Jared Bernstein

Wages of Fear
Paul Krugman

I’m a Slacker Not a Quitter and You Should be Too
Jared Bernstein

Piketty on Economists
via Matt Bruenig

Piketty’s Triumph
Jacob Hacker, Paul Pierson, Heather Boushey, Branko Milanovic

A response to another attack on the Great Gatsby curve—and can we call it the “line to serfdom” instead?
Carter Price

Needed: Meaningful Progress on Income Inequality
Chris House

15 March 2014

12 March 2014

NY Fed Labor Conditions

The Federal Reserve bank of New York has published a cool interactive guide to labor conditions, using some familiar and some unfamiliar metrics. It looks like they are still working out the kinks, but, when fully operational, this will be a great resource. Now, if they only make these graphics embeddable, they will be approaching the same league as the St Louis Fed...

08 March 2014

Links of the Week - 7 March 2014

A weekly collection of links from the Conscience Warrior Newsfeed

Have we been living in an age of austerity?
Zachary Goldfarb

In a Dark Year, a Lighter Side at the Fed
Annie Lowrey

Capitalism for the Masses – Part III
Jonathan Wight

Higher Education: Different Questions Yield Different Answers
Jared Bernstein

Winners Take All, but Can’t We Still Dream?
Robert Frank

The Fed in 2008
Chris House

Screw Up In High School, If You Are Rich
Matt Bruenig

Capitalism for the Masses – Part IV
Jonathan Wight

The Minimum Wage Increase and the CBO’s Job Loss Estimate
Jared Berstein

Natural Big Lies
Paul Krugman

Warren Buffett reveals the one stock fund you need to invest in
Jia Lynn Yang

Ben Bernanke’s Biggest Mistake
Matthew Yglesias

What Effect Will a Minimum Wage Increase Have?
Brad DeLong

Should the state support anti-gay discrimination?
Matt Bruenig

Choose Your Monetary Adventure, Mt. Gox Edition
Paul Krugman

01 March 2014

Links of the Week - 28 February 2014

A weekly collection of links from the Conscience Warrior Newsfeed

I Can’t Find Enough Skilled Workers! (At the Crappy Wage I’m Offering…)
Jared Bernstein

Time to mobilize against inflation paranoia
Ryan Cooper

Here’s why blocking the Comcast merger is good for free markets
Timothy B. Lee

Stupidity in Economic Discourse
Paul Krugman

Karl Rove: Presidents Who Leave Deficits, Bad Economies, and War Are the Worst
Jonathan Chait

Microfoundations and Mephistopheles
Paul Krugman

A Faustian Bargain?
Chris House

When Will Social Conservatives Stop Demanding Special Rights?
Josh Barro

Iron Men of Wall Street
Paul Krugman

Affairs, Domestic and Foreign
Joseph Joyce

Ferrari Capitalism
Jonathan Wight

The Trouble With Being Abstruse
Paul Krugman

The Stimulus Success
Bill McBride

Is there a use for Real Business Cycle Models?
Chris House

The Stimulus Anniversary
Paul Krugman

Technological Progress Isn't Deflation
Matthew Yglesias

Are negative interest rates really the solution?
David Andolfatto

2008
David Andolfatto

Capitalism for the Masses – Part I
Jonathan Wight

23 February 2014

Winner-take-all and the long-tail: in response to Robert Frank

Robert Frank, in an interesting column in the NYT on the implications of technological change, argues that the winner-take-all scenario is likely to prevail over the long-tail scenario. I think it's important to distinguish between homogenous and heterogenous goods and services. For example, one of Professor Frank's examples is piano manufacture in the nineteenth century.

Piano manufacturing was once widely dispersed, for example, simply because pianos were so costly to transport. But with each extension of canal, rail and road systems, shipping costs fell sharply, and at each step production became more concentrated. Worldwide, only a handful of piano makers remain, as producers with even a slight edge have ultimately captured most of the industry’s income.

This is the textbook winner-take-all scenario. Those with the greatest comparative advantage, even if that advantage is small, drive their lessers from the market, and capture all gains to production.

Professor Frank compares the piano makers with the sellers of digital music downloads, citing research that indicates that "Digital song titles selling more than one million copies, for example, accounted for 15 percent of sales in 2011, up from 7 percent in 2007." This, according to Professor Frank, goes against the long-tail theory, which proposes that, as delivery systems become cheaper (iTunes, Amazon, etc versus big record labels and major retail stores), more market share will be captured by smaller artists.

I think there are two forces at play here. First, regarding the long-tail of digital music: Modern delivery systems likely do not nudge buyers toward top-sellers, at least no more so than archaic delivery systems. Sure, Amazon shows shoppers the top-sellers more than the niche items, but Amazon also knows something about users' preferences. I'm not sure that Amazon has ever shown me a Britney Spears or a Justin Bieber song to buy. That's probably because I don't buy that sort of stuff. I'm much more likely to see Wilco and Grant Green, because that's the sort of stuff I buy. In Olden-Times, Tower Records showed me tons of Madonna and Garth Brooks albums, probably because it had no mechanism to distinguish me from every other yahoo that wandered through the door. Thus, the modern delivery system encourages the purchase of niche titles, at least more so than the old system did.

As I said above, it's likely important to distinguish between homogenous and heterogenous goods and services. In the digital music marketplace, there are both homogenous services and heterogenous goods being sold. When I am shopping for music, I have many artists to choose from. No single one is objectively any "better" than any other; this is personal preference. As I argued in the last paragraph, niche (lower popularity) artists have a greater opportunity to be heard because barriers to entry are so low. On the other hand, Amazon provides a (more or less) homogenous service. Shoppers patronize Amazon because they are a good (easy, cheap, reliable) way to browse and buy music (and rare art, among other things). Amazon has captured much of the market because it is objectively better at providing the service it provides, than, say, whoever is selling music in brick and mortar shops in 2014. The same technology that allows the long-tail theory to hold for independent artists allows Amazon to vacuum up much of the market share in the provision marketplace.

It's not inconceivable that the winner-take-all hypothesis holds in situations where providers of goods and services can be roughly ranked from best to worst. On the other hand, if personal tastes and preferences are significantly material, there is no reason that the long-tail hypothesis cannot also be true.

22 February 2014

Links of the Week - 21 February 2014

A weekly collection of links from the Conscience Warrior Newsfeed

Krugman the moderate
Noah Smith

How Economics PhDs Took Over the Federal Reserve
Justin Fox

A Well-Known Liberal Bias
Chris House

Do the economic facts have a conservative bias?
Noah Smith

Not All Forms of Wealth Are Equally Pernicious
Karl Smith

Big Ideas in Macroeconomics: A Review
David Glasner

Reverse Notch Blogging
Paul Krugman

The One Percent
Robert Solow

How the New Classicals drank the Austrians' milkshake
Noah Smith

Who benefits from benefits?
Chris Dillow

Eight things ‘Downton Abbey’ can teach us about the modern economy
Steven Mufson

Does cutting government make it more efficient?
Noah Smith

Why Do You Care How Much Other People Work?
Paul Krugman

Inequality and Indignity
Paul Krugman

Yellen and the Labor Market
Paul Krugman

The HFT arms race
Noah Smith

New Realities
Alicublog

Market Failure and Political Failure
Jeffrey Frankel

Economist Jason Furman is the wonkiest wonk in the White House
Zachary A. Goldfarb

Conscience Warrior

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