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ECB boss Mario Draghi was attacked by a protester today during a journalist briefing. And just when things are looking up. From Barclays:
On 22 January, the ECB announced that it was expanding its asset purchase programme to include government bonds, agencies and international institutions. Although the ECB’s announcement of QE in January was not a surprise, the strong commitment to an open-ended programme and the amount of monthly purchases have resulted in a larger-than-expected market effect, with further declines in yields and spreads, an acceleration in the depreciation of the euro and a boost for stock markets. These effects have amplified the impact of previous measures on monetary and financial conditions, and we think they are likely to gradually facilitate the economic recovery and limit the downside risk to price stability, although it is still too early to be more conclusive at this stage.
QE had a strong and swift impact on financial markets, but it will take more time to translate into significant effects on GDP growth and inflation. Although it is much too early to draw conclusions on whether or not QE has been successful from a macroeconomic perspective, we look at the four main channels of monetary policy transmission to the economy and give a preliminary assessment on its macroeconomic impact.
We see four transmission channels which are likely to impact the economy positively: 1) the depreciation of the euro (which boosts export competitiveness and inflation); 2) the reanchoring of inflation expectations (which prevent real interest rates from increasing); 3) the reduction in nominal yields (due to a reinforced forward guidance effect and the portfolio squeeze effect of the purchases); and 4) the portfolio rebalancing effect (the spillover to other asset classes such as corporate bonds, loans and equities).
View related content: Pethokoukis
Even more than most elections, perhaps, 2016 will be about which party has the better ideas to help the American middle class. But which middle class? A new paper from the St. Louis Fed breaks down the middle into three groups whose “demographic characteristics suggest it is unlikely to be persistently rich or poor” in terms of income or wealth or both.
For instance, “the demographic characteristics that are most likely to be associated with a poor family include being young, having less than a high school education, and being a member of a historically disadvantaged minority, either African-American or Hispanic of any race. At the other extreme, the characteristics most likely to be associated with earning a high income or possessing a great deal of wealth in most years include being middle-aged or older, having a college degree and being white or Asian.”
And each demographic group is faring quite differently. In “The Middle Class May Be Under More Pressure Than You Think” authors William Emmons and Bryan Noeth divy things up like this:
— Thrivers, which are families likely to have income and wealth significantly above average in most years and are headed by someone with a two- or four-year college degree who is non-Hispanic white or Asian.
— Middle class, which are families likely to have income and wealth near average in most years and are headed by someone who is white or Asian with exactly a high school diploma or black or Hispanic with a two- or four-year college degree.
— Stragglers, which are families likely to have income and wealth significantly below average in most years and are headed by someone with no high school diploma of any race or ethnicity and black or Hispanic families with at most a high school diploma.
And their findings:
The median incomes of thrivers and stragglers were slightly higher in 2013 than in 1989—about 2 and 8 percent, respectively. The median income of the demographically defined middle class, on the other hand, was 16 percent lower in 2013 than in 1989. The median wealth of thrivers was 22 percent higher in 2013 than in 1989, while the typical family in each of the two other groups experienced large declines, of 27 percent among the middle class and 54 percent among stragglers.
A handy road map for policymakers when thinking about how to prioritize policies, yes?
View related content: Pethokoukis
I certainly understand the supply-side desire to sharply reduce or eliminate investment taxes. It would be quite costly to the budget, however. But maybe there is a way to do both pro-growth tax reform and combat corporate short-termism, a problem I have written about here and here. From BlackRock CEO Laurence Fink in a McKinsey paper:
Even our tax code seems designed to encourage short-term strategies. Paying significantly lower taxes for capital gains, a major component of tax policy, is predicated on one-year holding periods. Who really believes a one-year commitment is long term? We made things worse when we shifted a few years ago to treating dividends as capital gains instead of ordinary income. That accelerated the tendency for companies to opt to return cash to shareholders in the form of dividend payouts or share buybacks—rather than reinvesting those funds in the business by developing a new technology, say, or building a new factory. The latter are the big, long-term bets that create jobs and keep an economy on top of the innovation curve. By not making them now, we’re robbing the future.
This wholesale return of cash to shareholders helps explain why equity markets are outpacing the economy. In the short run, we are rewarding shareholders, which causes the stock to spike. But to the extent that those cash expenditures starve corporate investment, the economy suffers. In particular, people who are riding the current wave will pay for it later when the ability to generate revenue in the long term dries up because of the lack of investment in the future.
We should be using the tax code to change this behavior, not reinforce it. For example, another form of short-termism that makes it difficult for companies to focus on long-term strategy is the constant pressure to produce quarterly results. Where does that pressure come from? It comes from investors who are renters, not owners, who are going to trade your stock as soon as they can pocket a quick gain—or sooner if there’s no such gain in the offing. But what if we made three years rather than one the holding period necessary to qualify for capital-gains treatment and at the same time brought down the capital-gains tax for each year an investor held, perhaps reducing it to zero at the end of ten years? And on the other end, what if we taxed capital gains at an even higher rate than for ordinary income if the stock was held for less than six months? These measures could quickly help to enlarge the population of engaged investors willing to ride out short-term slumps to better position the company for the long haul.
Fink goes on to cite other examples of short-termism, such as in retirement savings and infrastructure. But to get back to the cap gains stuff, ideas to similar to Fink’s have been floated by two pretty smart cookies who want more game-changing US innovation, business guru Clayton Christensen and venture capitalist Marc Andreessen.
First, Christensen: “We should instead make capital gains regressive over time, based upon how long the capital is invested in a company. Taxes on short-term investments should continue to be taxed at personal income rates. But the rate should be reduced the longer the investment is held — so that, for example, tax rates on investments held for five years might be zero — and rates on investments held for eight years might be negative.”
And Andreessen, from a series of tweets on how to create more fast-growing startups: “Zero capital gains tax for equity held for 5+ years, paid for by higher capital gains tax for equity held for <2 years.”
I dunno, short-termism would seem to be a great potential campaign theme.
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In my new The Week column, I defend the Marco Rubio tax plan (and offer a few criticisms) from those on the right who are unhappy that it isn’t a low-rate flat tax, an idea that was all the rage back in the 1990s. Here’s a bit:
When Rand Paul announced his White House run earlier this month, his campaign website featured a flat tax with a top 17 percent rate — the lowest top rate since 1916 — that would reduce U.S. tax revenue by $700 billion a year. Paul has since replaced those specifics with a vague promise to deliver “the largest tax cut in American history.” And during his announcement speech, Ted Cruz asked listeners to “imagine a simple flat tax that lets every American file his or her taxes on a postcard.” Back during the 2012 GOP presidential campaign, Rick Perry also proposed the flat tax-postcard combo, which the Tax Policy Centercalculated could lose as much as $1 trillion a year in tax revenue, not counting any added economic growth. Now, it’s one thing for a politician to offer an overly ambitious agenda and then scale back once in office. But these flat tax plans are more fantastical than aspirational. Rubio is smart to avoid them.
One part I originally wrote but cut was that we slashed top rates by more than half in the 1980s and early 1990s, and GDP growth didn’t explode. It averaged 3.1% from 1981 through 1992. Now I feel pretty confident that GDP growth would have been lower — perhaps significantly — if rates hadn’t come down. Reagan economist Bruce Bartlett (now a favorite on the left) argues that critics of those tax cuts “overlook the enormous importance of breaking the back of inflation at a relatively small economic cost — certainly far less than any economist would have thought possible in 1981.” And as the Bill Clinton economic team said in 1994,”It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth.” But my point is that you can’t just automatically assume lower tax rates will result in a prolonged period 4-5% GDP hypergrowth and wave your hand at both deficits and distributional issues in the 2015 US economy.
Also, my pal Ramesh Ponnuru has a great NRO piece on criticisms of Rubionomics, particularly the same Wall Street Journal editorial that I also mention in my column. The WSJ declared Rubio “strong on foreign policy, less so on taxes” and disparagingly called him the leading GOP proponent of the idea “that the Reagan tax-cutting agenda is a political dead end, and that the party now must redistribute revenue directly to middle-class families.”
But Ponnuru notes that (a) the WSJ ignores the many traditional pro-growth bits of the Rubio plan, including major corporate and investment tax reform, (b) the top rate has been lower than Rubio’s proposed 35% for only 5 of the past 80 years, (c) the Reagan tax cuts weren’t some purist, supply-side experiment, and (d) liberal criticisms of Rubio’s proposed child tax credit expansion would suggest a bidding war with the left is unlikely.
View related content: Pethokoukis
Yes, Governor Chris Christie is still going to run for president. And it appears that just as pension reform has been a core part of his New Jersey agenda, entitlement reform will be key to his national presidential agenda. From the WSJ: “Gov. Chris Christie called for reduced Social Security benefits for retired seniors earning more than $80,000 and eliminating the benefit entirely for individuals making $200,000 and up in other income, along with raising the retirement age to 69 from 67.”
This proposal will get lots of attention for touching the “third rail” and all that. (Here is AEI’s Andrew Biggs on the Christie plan.) Recently Republicans have seemed less enthusiastic in talking about Social Security and Medicare reform. House GOP budgets, for instance, have only called for a plan to create a plan on Social Security. But here’s where it gets interesting. Again, from the WSJ: “Mr. Christie’s speech comes at a moment when the fiscal austerity impulse in Washington has diminished.”
I am guessing that Christie will portray entitlement reform as pro-growth, not just as a way to shore up the programs and avoid a fiscal crisis. Here’s Christie today: “Every other national priority will be sacrificed, our economic growth will grind to a complete halt and our national security will be put at even graver risk.” Christie economic adviser Robert Grady makes the growth argument in greater detail in a 2013 WSJ op-ed:
The president claims to be concerned about spurring private investment. But investors at home and abroad can readily see that his steadfast refusal to reform the country’s entitlement programs threatens spending on physical infrastructure, education, university research and other items that will contribute to the future productivity of the United States. That same unrestrained entitlement growth, and the debt that comes with it, will ultimately compromise the value of dollar-denominated assets. Public companies have trillions of dollars of cash to invest sitting on their balance sheets, but the Obama economy’s growth record is weak, and insufficient to attract capital investment. … If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth—not income inequality or the redistribution of wealth—is the defining challenge of our time.
This theory also syncs with what Alan Greenspan has been saying lately. Here is the former Fed boss on CNBC not so long ago: “[Entitlements] are effectively crowding out savings, and because savings are the critical aspect in investment, it’s crowding out capital investment, and capital investment is key to productivity growth.”
Well, there is an argument to be made, I guess. But will voters find it too abstract and distant?
View related content: Pethokoukis
On Monday, Jim Pethokoukis appeared on CNBC to discuss candidates for the 2016 presidential election. In this segment, Pethokoukis looks at Hillary Clinton’s recent announcement of her presidential candidacy, what the Republicans need to do, and what we should expect. Watch the video to hear what he has to say about Clinton’s message and how it compares to the approach of Marco Rubio, who makes his own presidential bid today.
It’s an economic puzzlement. The US producer inflation index suggests computer chip prices have been flattish in recent years after a rapid decline from the mid-1980s through the early 2000s. Yet there is also evidence that microprocessor performance has continued to improve. Given the apparent relationship between declining chip prices and the pace of innovation, it would be really bad news if the slowing pace of price declines means innovation is slowing too. And really bad news for the overall economy. After all, semiconductors are “general purpose” technology behind advances in areas such as machine learning, robotics, and big data. As researchers David Byrne, [AEI’s] Stephen Oliner, and Daniel Sichel explain in “How Fast are Semiconductor Prices Falling?”:
… adverse developments in the semiconductor sector could damp the growth potential of the overall economy. On the other hand, if technological progress and attendant price declines were to continue at a rapid pace, powerful incentives would be in place for continued development and diffusion of new applications of this general-purpose technology. Such applications could both enhance the economy’s growth potential and push forward the ongoing automation that has generated concerns about job displacement.
But the puzzle may been solved. Byrne-Oliner-Sichel point out that in 2006, Intel began to dominate competitor AMD such that by 2013 AMD effectively “had been relegated” to the bottom end of the market. And with less competition, Intel changed its pricing structure by keeping list prices constant — “maybe attempting to extract more revenue from price-insensitive buyers” — while offering discounts some customers on a case-by-case basis. And such “price discrimination could reduce the information content of its posted list prices, potentially biasing the quality-adjusted indexes generated from these prices,” the researchers conclude. Indeed, there may also be price measurement problem with the computing equipment that use these microprocessors. The slowing decline in their prices is also a part of the argument that US innovation is stagnating. Here is the bottom line [also refer to above chart from the study]:
The results from our preferred hedonic price index indicate that quality-adjusted MPU prices continued to fall rapidly after the mid-2000s, contrary to the picture from the PPI. Our results have important implications for understanding the rate of technical progress in the semiconductor sector and, arguably, for the broader debate about the pace of innovation and its implications in the U.S. economy. Notably, concerns that the semiconductor sector has begun to fade as an engine of growth appear to be unwarranted. Rather, these results suggest continued rapid advances in technologies enabled by semiconductors.
The New York Times had a big story recently on the California water crisis. It seemed to suggest that too many people were the problem, too much development, too many green lawns. Here is the first quote:
Mother Nature didn’t intend for 40 million people to live here,” said Kevin Starr, a historian at the University of Southern California who has written extensively about this state. “This is literally a culture that since the 1880s has progressively invented, invented and reinvented itself. At what point does this invention begin to hit limits?”
Indeed, this was the featured image:
The piece eventually did get around to the issue of farming using 80 percent of the state’s water. Those darn almonds! This Bloomberg piece cuts to the chase:
In response to the ongoing drought, California Governor Jerry Brown has set limits on urban water use—ordering cuts of as much as 25 percent. Cities across the state will stop watering highway median strips and rip up grass in public places. Golf courses and cemeteries will turn on the sprinklers less frequently, and water rates might rise. …
California has plenty of water for the people who live there—it’s the crops and gardens that are the problem. Agriculture accounts for about 80 percent of the state’s water use. The state’s urban residents consume an average of 178 gallons of water per day, compared with 78 gallons in New York City, in large part because of how much they spray on the ground: Half of California’s urban consumption is for landscaping.
The big problem with the 90 percent of California’s water used on soil is that it’s frequently provided below cost and according to an arcane distribution formula. Angelenos do pay more for their water than New Yorkers—at 150 gallons per person per day, a recent water pricing survey suggests they would pay $99 a month for a family of four, compared with $63 in New York. But they’d use less on the garden if water were priced to reflect long-term cost. And thanks to a skewed system of water rights and underpricing, many of California’s farms are idling land while others are devoted to water-hungry crops like almonds, using wasteful systems. A little under one-half of California farms still use inefficient forms of flood irrigation.
Also check out this piece in Barron’s: “The real problem is water made plentiful and cheap by tax-supported investment. Water, like any commodity, should be priced according to demand, not according to politics.”
Democrats, unions and left-wing activists frequently argue that government (actually taxpayers) subsidizes Wal-Mart and other companies that employ low-wage workers since many of those workers receive government welfare benefits such as food stamps and Medicaid. And the mainstream media pretty much accept this reasoning. Here is CBS News: “Walmart’s highly publicized pay hike is a victory of sorts for its 1.3 million employees, but American taxpayers will foot the bill for the large subsidies that will still be needed to compensate for the discount retailer’s low wages.”
So, goes the theory, if Wal-Mart would pay its workers a “decent wage” — like a minimum of $10 an hour or $15 an hour (or more) — the retailer could get off the dole! The television show “House of Cards“ recently had a fictional presidential candidate bash Wal-Mart with this reasoning: “The starting salary for an employee at Walmart is below the poverty line. Now, the American government subsidizes Walmart to the tune of $7.8 billion a year by issuing food stamps to over one in ten of its workers.”
Well, that’s one way to look at it. Here is AEI’s Michael Strain, a fan of the Earned Income Tax Credit, yesterday at the Peterson Institute for International Economics addressing the “government subsidizes Wal-Mart” issue after it was raised by an audience member:
… we have to recognize that different agents in society have different responsibilities. Imagine you have workers, firms, and the government. … It it is simply unrealistic to expect that a firm that is ostensibly trying to maximize profits, although perhaps imperfectly, will take someone who can bring in five or seven dollars an hour in revenue and pay them two to three times that amount of money. It will be losing five or ten dollars an hour on every hour that person is working. That is just unrealistic to expect a firm to do in a market economy.
So then the question becomes, who is responsible for making sure that the employees of these organizations have adequate food, adequate shelter, adequate health care and who can meet a baseline level of material standing, especially given that we live in a society where we have a lot of billionaires. And to me, that answer is government through all of society. I don’t want those workers to be poor, and I don’t want those workers to not have enough food, and I don’t want those workers to have to deal with the cognitive load [from being poor].
But I want more than McDonalds and more than Wal-Mart to be responsible for making sure that those outcomes happen. I want the Koch brothers to be responsible. I want the Walton family to be responsible. I want me to be responsible, even though I don’t employ low wage workers. And so the way to do that is to tax people who have a lot of money and to redistribute it to people who are working hard and playing by the rules and who aren’t earning what we deem socially as an adequate standard of living. So you seem to want Wal-Mart and McDonalds to bear the entire brunt of that, and that’s implicit in the argument that somehow the government is subsidizing Wal-Mart and McDonalds, and I just fundamentally disagree with that framing.
Economist Justin Wolfers also had a response as to how the issue is framed: “You could say all these guys who work at Wal-Mart are on food stamps, and if they weren’t being paid a low wage, they wouldn’t be on food stamps. So therefore implicitly we are subsidizing the hell out of Wal-Mart. [But as Wal-Mart might see it], if they weren’t working at Wal-Mart at a low wage, they wouldn’t be working at all. The food stamp [cost] would be even bigger.”
Finally, economist Jacob Funk Kirkegaard points out that according to the “government subsidizes Wal-Mart” logic, nationalized healthcare — which many on the left might like — would be one massive subsidy to business: “I mean, if you take other countries where you have essentially a single payer public funded system, you could then say, ‘Well on the one hand, that implies that the subsidy provided by the public sector to the entire corporate world is 100%,’ right? Because no firm needs to take any direct cost for health care. It’s just basically taken care of, if you like.”
I spent this morning at the Peterson Institute for International Economics, attending a panel, “Raising Lower-Level Wages: When and Why It Makes Economic Sense.” (This compendium of brief articles and papers was also released.) Economist Justin Wolfers argued that it can be good business for some employers to voluntarily pay their workers more.
Now Wolfers didn’t argue this from a Keynesian, consumerist perspective — workers with fatter paychecks can spend more — but rather from a supply-side perspective of how higher wages can boost productivity: higher wages (a) motivate employees to work harder, (b) attract more capable and productive workers, (c) lead to lower turnover, reducing the costs of hiring and training new workers, (d) enhance quality and customer service, (e) reduce disciplinary problems and absenteeism, (f) mean fewer resources devoted to monitoring workers, (g) means fewer workers concerned about income security and thus performing less well at work. Lots of research on all of this — of what quality I do not know — though Wolfers conceded he would like to run a large experiment where a company cranked up the wages for one group of workers and not for a similar group. Anyway, here is a bit from what Wolfers has written on this:
Mani et al. (2013) recruited buyers in a shopping mall and asked them to think about their finances. Researchers observed that the performance of poor subjects on a cognitive test deteriorated if they were asked to imagine a large emergency expenditure (a $1,500 car repair), but no such deterioration was observed for well-off subjects. Mullainathan and Shafi r (2013) assessed a range of related experiments, finding that mental tasks that simulate the constant stress of poverty led people to act in compulsive and improper ways. Indeed, the World Bank World Development Report (2015), citing numerous field studies, recognizes that poverty taxes people’s mental capacities and self-control.
Also speaking was AEI’s Michael Strain who emphasized the role of the Earned Income Tax Credit in boosting living standards for low-income workers. More on that to come …