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The New York Times David Leonhardt explores “How the G.O.P. Can Court the Working Class.” He notes that the “American economy isn’t working very well for most families” and looks at some center-right ideas for correcting that — besides the usual of cutting top personal and business tax rates. One idea from conservative reformers is expanding the child tax credit. Turns out, there is some evidence it would have bipartisan political legs. This result from a new YG survey:
Over 90 percent of voters say tax relief for working parents is very or somewhat important, including three-fifths who say it is very important. Overall, 91 percent of voters say tax relief for working parents is very or somewhat important (62 percent say very important). Across party lines, majorities agree that it is very important, with an even higher percentage among Democrats (71 percent) than among Republicans (62 percent) and independents (54 percent).
2. Voters support a $2500 per year tax credit for children under age 18. Respondents were offered two alternatives on tax reform, with one focused on providing tax credits and the other saying the tax code should not be used for social engineering:
a) Congressman A says that middle-class parents need tax relief. Raising the next generation is an investment in our nation’s future, so we should let parents keep more of their own money to do it. We should give parents a tax credit of $2500 per year for each child under 18, and pay for it by eliminating tax breaks for corporations and the wealthy. The tax code should be pro-growth, pro-family, and pro-children.
b) Congressman B says that it is not appropriate to use the tax code to try to help families with children or for any other social goal. We should not give parents an advantage over people who choose not to have children. The purpose of the tax code should be to raise money for the government, period. Then everyone can make their own choices without being influenced by social engineers in the federal government.
Voters prefer the first alternative by a 68 to 27 percent margin, including a 73 to 24 percent margin among Democrats, a 65 to 29 percent margin among independents, and a 64 to 29 percent margin among Republicans.
Interesting that the con case for the idea is exactly the sort of criticism I hear on the right, particularly from libertarians. Despite that — and that the pro case includes tax hikes on the rich — the child tax credit expansion still is an overwhelming favorite among Republicans — not to mention pretty much everybody else.
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Steven Rattner, investment manager and former Obama administration “car czar,”argues (with lots of charts) in The New York Times for higher taxes and a bigger welfare state because, you know, inequality. If we taxed income more and transferred more incomes, US income inequality would be lower — at least as measured by the Gini coefficient metric.
But Rattner never quite gets around to saying exactly why less Gini coefficient inequality would make America a better place. For such a long, chart-laden piece, it’s strange that he doesn’t find the time to mention the following:
1.) A landmark study from the Equality of Opportunity Project — which includes rock-star economists Raj Chetty and Emmanuel Saez — examined millions of tax records and found that US upward mobility has change little in nearly half a century despite higher income inequality.
2.) The 2o14 study “A Comparison of Upward and Downward Intergenerational Mobility in Canada, Sweden and the United States” by Miles Corak, Matthew Lindquist, Bhashkar Mazumder found “almost no differences in upward mobility” between the US and the other nations, which both have lower Gini scores and thus less measured income inequality.
3.) In a recent economic literature review, the Manhattan Institute’s Scott Winship finds that (a) among developed nations, greater inequality tends to accompany stronger economic growth, (b) larger increases in inequality correspond with sharper rises in living standards for the middle class and the poor alike, and (c) countries with more inequality tend to have, if anything, higher living standards. As Winship said at a recent Intelligence Squared debate, “So, essentially if you enlarge the pie enough, the economic pie enough, then the poor and middle class actually can get more pie even if their slice becomes skinnier.” Indeed, while after-tax/transfer income for the 1% is up 200% since 1979 through 2011, middle-class income is still up 40%.
It’s also odd that Rattner assumes cranking up taxes and enlarging the welfare state doesn’t risk slowing GDP growth and job creation. After all, US per capita GDP is 25% larger than other large, advanced economies such as Germany and France. And does Rattner think wealth derived from creating a fantastic new product or services is of no more societal value than wealth from manipulating corporate pay or benefiting from a crony capitalist bailout?
Anyway, rather than focusing on income inequality right now, policymakers would be better serve America by figuring out what government can do — more of some things, less of others — to help raise GDP growth, create more good-paying jobs, and reform a welfare state so that it encourages work.
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My friend Steve Moore, Heritage Foundation chief economist and former Wall Street Journal writer, doesn’t like the conservative idea of cutting the tax burden and increasing take-home pay of American parents by expanding the child tax credit. For one thing, he says, “reform conservatives would raise top marginal tax rates to pay for it,” a supposed supply-side no-no. But as Ramesh Ponnuru points out: “The leading proposal to expand the child tax credit, that of Senator Mike Lee, cuts the top marginal tax rate, and makes up the lost revenue by shrinking tax breaks and flattening tax rates.”
Moore outlines other objections in a his recent American Spectator piece. He worries too few Americans are paying federal income taxes and even fewer would pay under this new plan. But that view ignores federal payroll taxes, excise taxes, and the burden workers bear from the corporate tax. In fact, Moore suggests making all those non-income tax payers start paying taxes. Moore: “The better way to go is to ensure that nearly everyone—except the very poor—pays at least some income tax.”
So the Republican Party — tagged as the “party of the rich” — should head into 2016 with a plan to cut taxes on the rich and raise them on working class Americans? Hmm. (And by the way, there doesn’t seem to be any evidence that turning people into non-income tax payers nudges them into greater support for expanding government.)
Anyway, what should the GOP pitch to the middle-class be, according to Moore? This: cutting the top income tax rate would boost GDP growth, which in turn would broadly boost middle-class incomes. Moore:
My friend April Ponnuru, a prominent reformicon, says that Republicans have “nothing to say to a mother with three kids” in the bottom half. Yes, we do: it’s called growth and opportunity, which come from businesses and jobs, which come from things like supply-side tax cuts. These dots aren’t that hard to connect.
I am having trouble connecting those dots. The tax reform plan recently put forward by Rep. Dave Camp would lower the top marginal rate to 25% from 40% (including a 10% surtax on the rich), but would likely increase the size of the economy by less than one percent over the next decade. Deeper cuts might boost the economy more, but advocates need to explain how they’ll pay for them. Plan beats no plan. And, please, show you math. What’s more, trends in globalization and automation might mean that while modestly faster GDP growth increases average incomes, median incomes might not rise as much or at all.
Then there’s the possibility that many Americans just don’t believe the traditional supply-side message. Did Mitt Romney’s plan to deeply cut top tax rates really win many votes? And a recent poll found that just 40% of respondents said high-end tax cuts would boost growth vs. 58% for the minimum wage. When incomes for the top 1% have risen by 200% over the past three decades vs. for 40% for the middle class, it’s not surprising that Americans wonder about the wisdom of cutting top tax rates.
But as Ramesh Ponnuru puts it, “There is no reason we cannot have a tax code that is more pro-growth, more pro-family, simpler, and fairer than the current code. Senators Lee and Rubio are working toward that goal. Why not join them?” Indeed, conservative reformers would combine an increase in the child tax credit and other income tax reform with bold business tax, anti-cronyist regulatory, and education reform for a modern economic agenda to meet 21st century challenges. Smart politics, even better policy.
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Just what are the economic benefits and costs of high-skill immigration? It’s a good time to consider the question. Although most attention surrounding President Obama’s impending executive action has focused on illegal immigration, it will also have a high-skill component. From Fox News: “The plan calls for working with the State Department to expand visas for foreign-born workers with high-tech skills, to support U.S. businesses. This is projected to offer another half-million immigrants a path to citizenship.”
Details are sketchy, but according to The Hill, “One idea floated by the industry would recapture and issue unused green card numbers that expired from previous years, potentially freeing up 200,000. Another would allow people who have been approved for a green card to apply to work even when there is a wait for their visa number.”
Importing more smart and skilled people — and letting the ones already here stay longer — would seem self recommending, but it might not be that simple. In the new paper “The Effect of High-Skilled Immigration on Patenting and Employment: Evidence from H-1B Visa Lotteries,” researchers Kirk Doran, Alexander Gelber, and Adam Isen find that winning the H-1B, high-skill visa lottery has “an insignificant average effect on patenting,” meaning these new workers may not make firms move innovative. But the team considers this the marquee finding:
On employment, our paper is the first to our knowledge to document evidence that H-1Bs displace other workers. In most specifications, the estimates indicate substantial and statistically significant crowdout of other workers within one year of the start of the visa. Thus, over this time frame our findings generally rule out the scenario in which one additional H-1B visa immigrant leads to an increase in total firm employment of greater than one, and they generally rule out the claim that an additional approved H- 1B visa has no negative effect on the employment of other workers at the same firm.
In other words, these new high-skill workers tend to replace the existing workforce, perhaps at lower wages. They compete rather than complement. This is a contrarian finding, as the report concedes. Indeed, AEI’s Madeline Zavodny has conducted research suggesting that 100 additional H-1Bs are associated with 183 more jobs among US natives. And the authors also offer this caveat:
The majority of H-1B workers—including those in our sample—do not have the advanced degrees that would be most closely associated with innovation. Many H-1Bs are not in scientific industries, and among the 56.43 percent that are in scientific industries, many H-1B workers perform jobs (e.g. technical support) that might not be expected to lead to patenting in the overwhelming majority of cases. … It is also possible that other types of high-skill immigration, such as O-1 visas given to those with “extraordinary abilities” or proposals to encourage advanced degree holders to stay in the U.S., have more positive effects on patenting or employment.
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The Atlantic recently conducted its first Silicon Valley Insiders Poll, where a panel of 50 executives, innovators, and thinkers answered questions on technology, innovation and more. Below are the biggest barriers to innovation, according to the panel. As you can see, the number one answer was government regulation/bureaucracy:
This should be no surprise, given what recent research has turned up on regulation’s effect on innovation, entrepreneurship, and economic growth. Take the research from Antony Davies at Mercatus that shows more regulated industries produce lower growth. Or the report from Ian Hathaway and Robert Litan at Brookings that finds there has been a long term decline in entrepreneurship in the US (as Jim Pethokoukis points out in his post). Hathaway and Litan comment on their report:
[W]e have speculated in comments since our report that mounting regulation – from all levels of government – could be one factor frustrating job reallocation while tilting against entrepreneurship. Younger, smaller firms do not have the resources that larger, more established firms do to hire full-time attorneys or compliance officers, which should put them at a progressively larger competitive disadvantage as regulations continue to grow in number and complexity.
Regardless of whether you’re talking about small businesses or Silicon Valley entrepreneurs, it’s hard to innovate and branch out if you’re mired down with complex and onerous regulations. Here’s Ashwin Parameswaran’s take in an interview with Pethokoukis:
We have too many regulatory barriers to new firms starting up. It’s too expensive for new firms starting up in many parts of the economy. To give you two very obvious examples: finance and healthcare, where the notion of a start-up is an oxymoron. In most parts of these sectors, you’d have to spend a few million dollars on lawyers and dealing with regulators before you could start a new business up. That’s a huge barrier to entry.
It’s true in a lot of other places. I think in some instances, it’s much worse in the United States than it is in places like the United Kingdom. A great example would be occupational licensing and the sort of regulations you have on food, which are probably a little bit more lax in the United Kingdom. One of the criticisms I get a lot from people is that people assume that I am talking about Silicon Valley entrepreneurs. … [B]ut I’m talking about much more mundane and widespread innovation: the small entrepreneurs, the people who start up food carts on the street or the people who want to run small farms doing something interesting.
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It matters, I think, if the rich are mostly getting richer because (a) technology and globalization enables more value creation or (b) they’re able to somehow manipulate the system. French economist Thomas Piketty thinks it’s (b), and this rent-seeking by the 0.1% is resulting in stagnation for the 99.9%. As he writes in “Capital in the Twenty-First Century”:
The increase in very high incomes and very high salaries primarily reflects the advent of “supermanagers,” that is, top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labor. One possible explanation of this is that the skills and productivity of these top managers rose suddenly in relation to those of other workers. Another explanation, which to me seems more plausible and turns out to be much more consistent with the evidence, is that these top managers by and large have the power to set their own remuneration, in some cases without limit and in many cases without any clear relation to their individual productivity, which in any case is very difficult to estimate in a large organization.
In a must-read National Review piece, researcher Tino Sanandaji argues that Piketty has the story wrong, specifically his claim that 60 to 70% of top 0.1% income comes from these “supermanagers.” The study Piketty cites as evidence does not suggest what Piketty thinks it suggests. The study in question is “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data” by Jon Bakija, Adam Cole and Bradley Heim. And it concludes:
The data demonstrate that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005
Here’s the problem, according to Sanandaji: The study includes self-employed business owners among executives and managers. The study does not show whether the top earners were entrepreneurs running their own companies or hired executives. But the tax data used by the authors does allow the authors, as Sanandaji explains “to make a rough division between “salaried” and a “closely held business,” in which the owners receive pass-through income.”
And when you do tha drill down, you find that of the 0.1%, (a) 27% were “executives, managers, and supervisors” in closely held companies, plus entrepreneurs and farmers, (b) 20% were salaried “executives, managers, and supervisors” outside the financial sector, (c) 18% were in finance, (d) 1% belonged to various groups of professionals (lawyers, doctors, management consultants, computer scientists, engineers, academics and top earners in art, media and sports).
The claim that 60–70 percent of top earners are salaried corporate executives whose compensation is determined by their hierarchical superiors is thus shown to be incorrect. Neither entrepreneurs nor hedge-fund managers fit Piketty’s definition of the “supermanager.” The type of big-business supermanager Piketty describes would almost entirely belong to the category of salaried executives and managers. But this group only includes 20 percent of top earners, and even this category contains many wealthy entrepreneurs. (The occupation description in the tax data used in this study classifies the chairman of Microsoft and the CEO of Amazon as salaried executives.) …
In the discussion of top 0.1 percent earners, Piketty explicitly says the following: “‘Superentrepreneurs’ of the Bill Gates type are so few in number that they are not relevant for the analysis of income inequality.” This is not the case. It would be more accurate to write that corporate executives are so few in number that they are not relevant for the analysis of income inequality. … The $18 billion earned by the 7,000 salaried executives working for the largest American corporations equals the collective earnings of merely the ten best-paid hedge-fund managers last year!
But maybe lots of those superwealthy business owners are the scions of the founders, rather than the founders themselves. Piketty claims that inherited wealth constitutes 60 to 70% of billionaires. Not so, says Sanandaji:
One of the main sources of data on top wealth is the Forbes list of billionaires. According to Forbes’s classification, around 70 percent of American billionaires are self-made in the sense that they did not inherit large fortunes. The Forbes estimates are quite problematic for Piketty’s theory, which predicts that most top wealth should be inherited.
Maybe Piketty’s depiction of the superrich applies to France, which has a fourth as many self-made billionaires per million people as America. Anyway, Sanandaji concludes:
Piketty certainly has a point in that the Right tends to use “entrepreneurs” as poster boys to justify inequality. Many of the rich are not, in fact, entrepreneurs. It’s not clear to me that recent the explosion of speculative finance and real-estate constitutes socially productive innovation. Even when it comes to productive entrepreneurship, it is by no means a given that any level of inequality can be justified by entrepreneurial innovation.
Ayn Rand had her protagonists invent amazing sci-fi technology that no one else can replace in order to justify no moral boundaries to the wealth share “creators” claim. That’s all well and good in her stories, but how should we think of distributional issues if the rich don’t invent super-steel and perpetual-motion machines?P
But there are also obvious problems associated with the other extreme — totally ignoring entrepreneurs. Piketty’s Capital creates an alternative universe where the rich consist of rentiers born with a silver spoon in their mouths and big-business CEOs who serve themselves raises with the same. This image of the rich is convenient for the Left, but inaccurate. Leaving out entrepreneurs leads Piketty astray in several places.
I looking forward to the response from Piketty or his supporters.
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When the possibility of deflation is dismissed or even welcomed, it reminds me of a “Curb Your Enthusiasm” episode. If I recall the plot more or less correctly, Larry David was trying to join a Republican country club for some reason. Anyway, while pretending to be a stereotypical GOP rich guy — the rich part was easy since David in real life is worth nearly a billion dollars — he made the following dismissive remark about global warming, “People like it a little warmer, don’t they?”
Hey, people like lower prices right? What’s wrong with a little deflation? I, for one, love paying less for a better flat screen TV. And wasn’t there deflation during the booming late 19th century? The thing is, though, there is good deflation and bad deflation. A helpful primer from The Economist:
A short spell of deflation driven by cheaper oil would in some circumstances be a tolerable thing. Indeed there are times when deflation can be a symptom of encouraging underlying developments. It can, for example, be brought about when advancing productivity enables the economy to produce more goods and services at lower cost, raising consumers’ real incomes. There were several such periods of “good deflation” while the world was on the gold standard; with growth in the money supply constrained, prices were pushed down whenever the volume of output grew rapidly. Michael Bordo and Andrew Filardo, two economic historians, point to America’s 1880s as a period of “good deflation”, with output rising by 2% to 3% a year from 1873 to 1896. For all the aggregate benefit, though, falling real wages hurt workers in many sectors.
By contrast bad deflation results when demand runs chronically below the economy’s capacity to supply goods and services, leaving an output gap. That prompts firms to cut prices and wages; that weakens demand further. Debt aggravates the cycle: as prices and incomes fall, the real value of debts rise, forcing borrowers to cut spending to pay down their debts, which ends up making matters worse. This pathology did great harm during America’s Great Depression, which was when Irving Fisher, an economist, diagnosed it under the name “debt deflation”. Deflation in Germany at the same time, though eclipsed in the common memory by the damage done by the hyperinflation of the 1920s, caused a number of multiple bank collapses. The resulting unemployment, wage cuts, and credit crunch helped radicalise workers and fed support for the Nazis.
Which of those situations better describes what’s happening in the eurozone right now? And when US prices were falling in 2009, was that due to technological innovation or a collapsing economy? I’ll be honest, the distinction seems pretty obvious. Yet too often — at least on the right — deflation is treated as if it were always and everywhere a good thing. But how do policymakers figure out whether deflation is good or bad? Scott Sumner frames it this way: “In my view deflation is neither good nor bad, just irrelevant. On the other hand falling NGDP matters a great deal, and should be avoided.” So have the Fed — preferably through a market-driven tool like a NGDP futures market – target the the level of total spending in the economy at 4-5% a year. Supply-side factors would determine what share nominal GDP growth is real GDP.
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Changes in economic conditions, government transfer programs, and federal tax laws have resulted in after-tax income growing at different rates across the income spectrum over time. For households in the lowest quintile of before-tax income, inflation-adjusted after-tax income was 48 percent higher in 2011 than it was in 1979, CBO estimates. Cumulative growth in the inflation-adjusted after-tax income of households in the 21st to 80th percentiles, the 81st to 99th percentiles, and the top 1 percent of the before-tax income distribution was an estimated 40 percent, 67 percent, and 200 percent, respectively.
So middle-class incomes — as defined here — rose by 40% in real terms — and are today about where there were prerecession. All of which can be seen in the above chart. Another CBO finding: inequality is lot less when you take into account transfers and taxes. As Scott Winship tweeted: “Taxes & transfers lowered U.S. Gini from .59 to .44 in 2011. … Latter is up, but only from .36 in 1979″:
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It’s perhaps more extreme than we thought. From “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data” by Emmanuel Saez and Gabriel Zucman:
This paper combines income tax returns with Flow of Funds data to estimate the distribution of household wealth in the United States since 1913. We estimate wealth by capitalizing the incomes reported by individual taxpayers, accounting for assets that do not generate taxable income.
We successfully test our capitalization method in three micro datasets where we can observe both income and wealth: the Survey of Consumer Finance, linked estate and income tax returns, and foundations’ tax records.
Wealth concentration has followed a U-shaped evolution over the last 100 years: It was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012—a level almost as high as in 1929. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined.
The increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality. Top wealth-holders are younger today than in the 1960s and earn a higher fraction of total labor income in the economy. We explain how our findings can be reconciled with Survey of Consumer Finances and estate tax data.
This is a new finding. As The Economist notes, “Earlier studies of American wealth have tended to show only small increases in inequality in recent decades.” Rather than dispute the data, let’s consider a different question: Does it matter how the wealthy got so wealthy? Did they inherit it or create it? Does the mix matter? The authors note, “Due to data limitations we cannot provide yet formal decompositions of the relative importance of self-made vs. dynastic wealth, and we hope our results will motivate further research in this area.”
But the fact that the rich are younger today than half a century ago — despite an aging population aging — may provide a clue. Also consider than the US has 3-4 times as many billionaire entrepreneurs per million citizen as other large advanced economies. Such high-impact entrepreneurship creates a more dynamic, prosperous country.
But here is a counterpoint from The Economist:
Yet one should not yet rule out the return of Mr Piketty’s “patrimonial capitalism”. The club of young rich includes not only Mark Zuckerbergs, the authors argue, but also Paris Hiltons: young heirs to previously accumulated fortunes. What’s more, the share of labour income earned by the top 0.1% appears to have peaked in 2000. In recent years the proportion of the wealth of the very rich held in the form of shares has levelled off, while that held in bonds has risen. Since the fortunes of most entrepreneurs are tied up in the stock of the firms that they found, these shifts hint that America’s biggest fortunes may be starting to have less to do with building businesses, just as Mr Piketty warned.
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The United States has an imperfect Internet. There is little competition in wired broadband, limited mostly to a cable company and a telecom carrier offering less powerful DSL access. Consolidation is shrinking the number of players further. And mobile broadband, while more advanced than in most other countries, is not yet a real competitor for fast fixed broadband.
The cable companies that provide most fast broadband have a clear motivation to discriminate against content from rival sources to protect their business model. And their combination with programmers like NBC increases the risk of discriminatory treatment.
But these shortcomings won’t be fixed by regulating the flow of content on the Internet like electricity through the wires or voices traveling down a phone line. Stopping unreasonable discrimination can be done at a lower cost, on a case-by-case basis that does not imperil perhaps the most important objective of all: extending the Internet to all Americans.
President Obama is right when he argues that the broadband companies connecting Americans to the Internet “have special obligations not to exploit the monopoly they enjoy over access in and out of your home or business.” In the absence of more competition, this will have to be monitored by regulators. But the monitoring should be performed at the least possible cost.
Again, what it comes down to is increasing the level of competitive intensity. Oh, that and who pays to upgrade internet infrastructure. AT&T CEO Randall Stephenson, today, via Reuters:
AT&T Inc will stop investing in new high-speed Internet connections in 100 U.S. cities until regulators decide whether to enact tough “net neutrality” rules proposed by President Obama, Chief Executive Officer Randall Stephenson said on Wednesday. … “We can’t go out and invest that kind of money deploying fiber to 100 cities not knowing under what rules those investments will be governed,” Stephenson said at an analyst conference.