My First Reaction to the Jobs Speech

My reaction is basically, meh.  The payroll tax cut hasn't proved very effective so far, I'm sceptical of tax measures at this time.  If we're going to act through taxes an increase in the standard deduction seems more effective because it would give proportionally more back to the very poorest who will spend more and are fairing particularly badly while giving everyone something back.  I never really understood why this part of the tax code doesn't get mentioned much in the US, after college and having a fairly low wage job I really noticed the difference between the US and Canadian tax codes (Canada has about double the amount for the roughly equivalent basic personal amount $10,320 vs. $5,800).  It would be much better targeted for stimulus than the payroll cut (which incidentally is paying for our supposedly Ponzi scheme Social Security).

The employee hiring tax holiday provision seems unlikely to make much difference to me, the cost per employee seems so much higher than the part of this in taxes that I just don't see it making a big difference.  Public spending and preventing more firing in the public sector seem like more effective means (though linking this to something like foregone or reduced COLA in the next contract seems like a good trade off here, job security vs. salary seems fair and it would put off reductions in employee spending to the future as well as give better long run budget numbers).  Anyway, this might be the best possible given current politics, but that doesn't make it impressive.

[Update: Read a bit more about the plan this morning.  There's more direct stimulus than I thought, which makes it slightly better.  I remain very sceptical about temporary stimulus through tax cuts, while permanent tax cuts work as stimulus what I've read about temporary cuts is very mixed.  If cuts are targeted towards income constrained individuals they work, but people who do not suffer these constraints tend to act closer to a lifetime income model and there will be little change in their spending.  The payroll tax cut is better than some, but any stimulus that gives the most to the people least likely to use it seems badly targeted.  Why simply maxing the first $12,000 of income or so non-taxable isn't ever mentioned or considered is beyond me (with the current standard deduction of $5,800 this would effectively give everyone with an income over $12,000 $795 and it seems like an easy sell, saying we'll make your first X amount of income non-taxable sounds straightforward to me, a payroll tax deduction however would only give $400 to someone making $20,000 and $2,000 to someone making $100,000, admittedly, going the income exclusion amount would mean making this a refundable tax credit instead [wrote too fast here, though a tax credit of the size of the rebate would work, our tax system makes any simple changes difficult because there will be odd interactions with other taxes and exemptions, I'm sure that someone that knows more about the tax code than I do could make this work without too much trouble], since EITC and other tax credits/deductions leave many poor people having no income tax after adjustments (or a tax exclusion could be imposed on the payroll tax instead of a rate deduction), but it can still be sold in such a straightforward manner that popular support would probably be with it, it is just insane to be giving $2000 to someone who is unlikely to spend it when the person who will spend it only gets $400).

Looking at the NY Times columnists, Krugman seems happy about it, but it sounds like a story of low expectations to me.  Brooks makes a rather curious comment about Reinhart and Rogoff:

The general lesson I take from this history is that policy makers stuck in a financial recession should probably think about the long term. You’re going to be stuck with a lousy economy anyway. Anything you do to try to boost the growth numbers next month or next quarter is going to be overwhelmed by the underlying forces

Which baffles me because Reinhart and Rogoff say:

Policy makers must recognize that banking crises tend to be protracted affairs.  Some crisis episodes were stretched out even longer by the authorities by a lengthy period of denial... Our extensive coverage of banking crises, however, says little about the much debated issue of the efficacy of stimulus packages as a way of shortening the duration of the crisis and cushioning the downside of the economy as a banking crisis unfolds.

Brooks is seeing what he wants to see here, I certainly didn't end up with that takeaway from Reinhart and Rogoff.  An important thing to note with crises is that prior to the Great Depression there was a substantial subsistence economy propping up demand even during the crisis.  Even during the Great Depression "about half the poor during the Depression years grew some of their food, 30 years later about 85% of poor people lived off the farm.  For them, nothing was free." (Patterson 42)  There was also a large pool of tenants and sharecroppers, particularly in the South, that were largely outside the broader society and that lived at subsistence level.  The point being, Reinhart and Rogoff's data set has very few post WWII banking crises, it is very hard to draw conclusions from the data set regarding the modern economy when we don't have a parallel small farm economy creating an island of demand in the midst of depression operating by its own rules.  By the Great Depression this had become to small to do much, and is even smaller now, in previous crises however, the farm economy was larger than the rest of the economy.  Regarding stimulus, all Reinhart and Rogoff can really say is we don't know.]

If Social Security is a Ponzi Scheme, so is Society

The line about Social Security being a ponzi scheme annoys me.  It is in the sense that it requires new workers to pay for old workers.  But in this sense, so is a family, a corporation, or society itself.  All organizations require constant infusions of new blood to work.  The difference between these things and a ponzi scheme is that they have actual value, they do something.  A Ponzi scheme involves a shell investment with no intrinsic worth, which is not the case with Social Security.  Just because it requires new workers to pay for it doesn't mean we don't gain value.  Does anyone really want to face the prospect of not being able to move because we might have to take care of mom and dad in their old age, or go back to having an extra bedroom in the house for when our parents are to old to work?  I don't think so.  We get value from it, just like we get values from organizations.  The inter-generational transfer aspect is shared among all social institutions pointing this out shouldn't be perceived as a gotcha.  It really shows how much damage has been done to our society that pointing this out seems like a gotcha to so many people.

Misconceptions about the Poor

So, the radio show this morning picked up the topic of Michigan's cut in maximum time on welfare to four years.  My opinion on this is simply that it isn't going to save much money (very few people reach lifetime limits as is and welfare is quite cheap) but it is going to hurt some people quite badly.  That said, most of the people that are being hurt are the ones that would have hit the five year mark anyway, so it doesn't change all that much.  I just can't get excited about it.

What I do find interesting though is hearing the opinions first hand of what people who have no idea what they're talking about think of welfare.  I already know the far right stereotype, people sponging off the system who refuse to get jobs, and I was pretty sure this was widespread.  But I spend too much time on political sites to be sure of this, hearing it today on the radio confirmed this.

So, what are the misconceptions I was hearing?  First, welfare fraud.  Apparently, we know know welfare fraud is rampant.  Depending on how welfare fraud is defined, this is either true or completely false.  It is true in the sense that most people on welfare have some unreported income, most people on welfare do some under the table work or get some help from family members.  This often amounts to about a third to a half of total income and they are supposed to report it.  Most don't.

However, listening to callers, this isn't what people think of when they hear welfare fraud.  They think of people gaming the system to get multiple checks and using welfare as their sole source of income.  This form of welfare fraud is rare, and newsworthy when it happens.  It does happen, but rates of fraud involving multiple checks, false identities, or receiving a check when well above the poverty line are in the low single digits.  Hardly rampant.

The second myth is that these people are receiving assistance instead of working for long periods of time.  Most people on welfare are only on for a few months.  Only about a fifth are on it for more than a year.  However, someone who has received welfare once is quite likely to have another short spell on welfare within five years.  This is because most welfare recipients are marginally employable and are in sectors that have high turnovers.

This makes them unsympathetic but leads to the problem of what to do with these people.  They have few skills but how are they supposed to get any if receiving welfare, which gives them far less than the poverty line and has asset limits, seems like a good option?  You can't save up for college at a minimum wage job, it just isn't enough money.  Training programs are inadequate and often have conflicting goals.  While long term studies are unfortunately rare, what I've read on the subject generally seems to agree that there is a trade off between two program designs.  One, aims at teaching job search skills and tends to have the higher rate of immediate employment and gets people off the rolls.  The second is longer term and skills focused, rather than focused on training people to just get a job, any job.  This kind of program tends to do very little to get people off the rolls or to get them jobs after graduating the program.  But studies that follow individuals more than five years out finds that the second kind of program leads to higher employment, more wages, and less likelihood of welfare after that time.  Training people in skills works, but not quickly and not on any politicians time frame.

  Especially if you have kids, which people on welfare probably do.  It's true that most of these people made their own mess but this doesn't mean that we have other options.  If the kids are consistently deprived because the parent's can't earn enough to give them proper nutrition then we just end up with another generation of welfare cases.

It's easy to complain about them buying beer and cigarettes, but these things aren't that expensive.  Studies show that welfare recipients spend about 6% of their income on entertainment (Jencks, Rethinking Social Policy, from memory so I may be off by 1 to 2%, single digits is correct though).  If they were perfectly responsible and never spent this money needlessly they'd probably be better off, but very few of us are perfect in our habits, why would the poor be any better than most of us?

Then there is the issue that many people on welfare have a lot of problems.  It's easy to say that cases will be examined to make sure the truly needy (what would have been called deserving a generation ago) continue to receive assistance but these groups are quite restrictive and don't include a lot of people who are going to chronically need some form of welfare if they function at all.  It's easy to say that we'll cover people who can't work at all, but this is just about nobody.  The people on welfare are mostly people who can't work regularly.  Health issues, especially mental health issues are common.  Someone might be fine and hold a job for a couple of years, then they have an episode and lose their job.  Welfare is what gets them by until they can work again.  But these people aren't picked up by work rules that tend to have a simple can work/can't work dichotomy which matches poorly with how health, and other kinds of, problems actually effect people (though it matches well with people's prejudices who tend to think that those that could work at one point still could if they tried).  These are the kinds of people on long term welfare, people that have a lot of trouble functioning in regular society.

None of this is to say welfare is a great thing.  It pays below the poverty line, it must be supplemented by work for someone to lead a decent life.  The problem with shortening or trying to get rid of welfare is when the question of what the alternatives are.  They don't simply go and get jobs when the welfare check runs out, being on welfare really sucks, these people are either trying to get jobs or thoroughly discouraged.  A greatly discouraged person is hardly going to be encouraged by being told they no longer even qualify for assistance.  Putting someone out on the street is hardly going to end dependency for someone with, at best, minimal levels of skills.  It's hard to get a job with no residence (not to mention the people on welfare who don't have a home, it really isn't enough to cover shelter in many areas without additional assistance).  Taking care of homeless people costs money, both for police who have that much more work to do and for the health care costs they rack up with every visit where they are treated for exposure.  Then there's always incarceration, which costs a fortune.

In the end, welfare isn't a great program and it's hard to like, but it is cheaper than the alternatives and cash assistance leads to less long term problems.  It's not great, but it is better.

Causal Misatribution, Markets Did This, Not Government

David Brooks has a very wrong-headed column this morning.  My primary problem with it is his usage of the culture of dependency argument, if not the term.  As I've said before, there is very little proof in favor of this argument and a great deal against it.  Let me explain.

According to Brooks:

The Republicans, and Rick Perry in particular, have a reasonably strong story to tell about decline. America became great, they explain, because its citizens possessed certain vigorous virtues: self-reliance, personal responsibility, industriousness and a passion for freedom.

But, over the years, government has grown and undermined these virtues. Wall Street financiers no longer have to behave prudently because they know government will bail them out. Middle-class families no longer have to practice thrift because they know they can use government to force future generations to pay for their retirements. Dads no longer have to marry the women they impregnate because government will step in and provide support.

Let's examine this piece by piece

First of all, financiers.  I shouldn't need to explain in detail that financiers have never behaved prudently without heavy government regulation.  The prudent simply aren't the ones that get rich in this industry.  This goes back centuries to the Amsterdam and London Exchanges.  Tulip mania didn't happen because Dutch investors thought the Republic would bail them out.  It happened because there was money to be made, until there wasn't.  It seems absurd to credit government with something that was happening regularly for centuries before government got in the business of bailing people out.  This is all on the market.

There is something to the middle class thrift argument but there are a few details that have to be noted.  First of all, even during the early years of Social Security there was a very high incidence of poverty among the aged, about 40 - 50%.  (Patterson 78)  So it doesn't seem that even the middle class were saving adequately for retirement before Social Security, there's little reason they would do so today if it were cut.

But market forces and the ensuing cultural changes had more to do with the institutionalization of Social Security than poverty fighting  did.  By the 1920s market rewards had begun to erode the old way of life.  Before then, it was quite normal for at least one son to stay on and take over the farm or the family business and be in a position to take care of elderly parents.  As poverty statistics show, this didn't always work out.  As a result of the growing prosperity linked to markets however, fewer and fewer Americans wanted this.  They wanted to move to new job opportunities and pursue a career different from their parents.  Markets meant that there were opportunities that previously never existed.  These opportunities required individuals to move into a market economy where they generated wealth through their own individual efforts rather than relied on past accumulation by their parents of land and other assets.  People were eager to generate wealth on their own rather than depend on their parents and later have their parents depend on them in turn.  To quote from Patterson (73):

With economic progress in the 1920s, the middle classes had begun to get accustomed to better life-styles.  They had fewer children, and they frequently moved away from their parents.  They did not want to lose what they had by being forced to take in the old folks.  For these people, the allure of old-age insurance was not the benefits they would ultimately receive themselves, which few Americans calculated carefully.  Rather, it was the assurance that they would not have to take care of their parents in the here and now.

In case that wasn't clear enough the changes in American society that brought rise to the pension movement were not some kind of top down change by government, it was a bottom up movement created by changing market opportunities.  We have Social Security because it became increasingly necessary as people transitioned from a local, subsistence economy into an integrated market economy and were exposed to new opportunities.  The government response was a result of not cause of these changes.

Of course, aside from the historical factors, it can also be noted that savings rates are higher in Europe where old age pensions are much more generous than in the United States (the most recent evidence I have for this is the charts in Alesina and Glaeser).  While it may still be arguable that government policy is to blame the policies involved are not those that make current workers pay for retirees.

Why I have Trouble Paying Attention to Libertarians

From a naive reading, it would seem that I'd have a lot in common with libertarians, after all the policies I favor can generally be described as socially liberal and economically conservative, at least in some senses of the term since I think spending has to rise but that deficits need to be closed (if the groups still existed I think Teddy Roosevelt Progressive or Eisenhower Republican updated to the 21st century most accurately describes my views).  But this isn't accurate once policy tendencies beyond the completely facile come into play, myself and libertarians exist in completely different and incompatible paradigms.

I was going to let this past, but it has been nagging at me.  Over at DiA a post on the new MLK memorial reminds me of why I disagree with libertarians so vehemently.  They simply don't have any well developed theory of the state, how humans groups form or act, or really about the very concepts of identity and culture and the role these play in human societies and the economy.  Their perspective is simply grossly inadequate for exploring political economy questions generally since they stick so closely to a fundamentalist definition of individualism without considering its historical evolution or role.  While a very minor issue, I think the MLK memorial post exhibits the very worst aspects of libertarian ideology and exposes why it is so ill equipped for understanding human action.

That King's monumental likeness was chiseled from stone by an ace aesthetic hype man for Mao, a dictator responsible for " one of the most deadly mass killings of human history", suggests a couple things. First, and most obviously, it suggests that monuments like this one are pieces of propaganda, attempts to manipulate a state's citizens (or subjects, as the case may be) into parcelling out honour, reverence and esteem according to an "official" account of the country's history. This is a line of business most states are in, but it is not a line of business I think liberal states ought to be in, even if from time to time they happen to exalt worthy heroes, such as Martin Luther King. Second, not only is propaganda morally dubious, but it is almost always aesthetically repugnant. The "worker's-paradise seriousness" Mr Page rightly detects in Mr Lei's new work is a sign that the artist has no notable interest in his subjects, but is instead a master of achieving a certain cheap effect, a vacuous sublimity easily mistaken for awed reverence, by means of a formulaic, emotionally rote approach to monumentality. Mr Lei is not hired to offer his interpretation of a subject—to create a portrait of a real, complicated man which reflects the insight and judgment of his personal artistic genius. On the contrary, he is hired not to interpret, to apply the same psychologically dead and mendaciously indifferent treatment to all his subjects. Mr Lei is a political bullshit artist, and it shows. That Chinese white granite is especially durable is a stupid reason to get stuck with this kind of soulless stone agitprop.

The first thing I'll deal with is the factual nature of these statements, though this is just to illustrate how ideologically biased this post it, it has little bearing on my critiques of the libertarian point of view.  First of all, the state played only an indirect role in developing this monument, only $10 million of the projects roughly $120 million cost was paid by the state as matching funds.  Most of the funds were raised by a foundation originating with King's fraternity and donations by private charities.

While the government did have to prove the design, they were not the motivating force behind suggesting what was chosen.  In fact, at least one government agency overseeing the design objected to it initially, though their objections were (obviously) overcome. 

The Flaws with Investment Centric Economic Thinking

After writing as much as I have recently on taxes I can't help but comment on a few articles in the NY Times today.  I'll admit upfront that this coverage may be an example of selection bias in the news, I couldn't find similar coverage of candidate's views on taxes in any of the more conservative sources I checked.*

The first article is a NY Times editorial on some candidates talking about tax rises on the poor.  This is absurd, US labor force participation has been falling since peaking in 1997-2000 and it is not at all controversial to point out raising taxes on these groups will lead to declining employment.  This is the last thing we need right now.  This is particularly wrong headed since the US is a naturally high participation rate economy, in a comparison of 10 countries the BLS found that we had the highest participation rate between 1992 and 2000, by 2002 Canada had overtaken us, by 2007 both Canada and Australia had, and by 2010 Sweden can be added in as a tie.  Now, I don't think this is all policy but I do think it helps to indicate that the Bush tax cuts focused on the wealthy didn't help and tax raises on the poor to help fund this will just exacerbate the situation.

The second article was on how tax evasion by companies was becoming a big area of emphasis to increase profits, some CEOs were making more than their company's Federal tax payments.  Not a lot of deep information here but it does indicate that the complexity of our tax code is extremely problematic and that it already favors the successful to such a degree that we must be far into the realm of diminishing returns to potential investment from this favorability.

The third, and most disturbing, article is on Huntsman's suggested tax changes.  I wanted to like Huntsman, but after this I can't.  He suggests:

There, aides said he will repeat his call for a tax code with dramatically lower individual and corporate tax rates, an end to taxes on capital gains and dividends and the elimination of the alternative minimum tax.
But in exchange, Mr. Huntsman will say the tax code needs to be stripped of all loopholes, deductions and tax giveaways, a step that would make the changes neutral in terms of how much money would flow into the government’s coffers.

Being in the middle of some reading on taxes I have to say this would be disastrous.  While I agree with the need to strip deductions and that rates should be lower to account for this we need more revenue to close the deficit, saying taxes would be dramatically lower would offset much, if not all, of the deficit reduction benefits.  More generally, our big problem right now is employment, growth wasn't doing so bad until the recession.  While whether or not this policy would increase growth is disputable there's no dispute that it would lower employment.  Shifting the tax burden away from capital and towards labor will activate many of those disincentives to work that I tend to go on about, such as in yesterday's post.  This policy would so heavily favor capital over labor that companies would have an incentive to eliminate labor in favor of capital even in some cases where this would be inefficient before taxes.  I have some idea of what economic theory is behind this, but it's madness and contradicts empirical findings on taxation.  

We need to have a real debate about taxes in this country; we have one of the most inefficient tax codes in the developed world.  But to do this we have to address what we actually know about taxes and the mixed effects they have, it's not just a trade off between taxes and growth but also a trade off regarding employment, labor and capital ratios, income inequality (and associated effects on politics as well as growth), human capital vs. physical capital, human capital vs. employment, etc.  Right now, this debate looks like the tax discussion is in its most damaging potential form with any action more likely to do greater harm than good.  Even sensible reforms, like lowering rates and eliminating loopholes, is being combined with other tax reforms that would do more than enough damage to make up for the gain.  It's frustrating.

*I am also reminded of how annoyed I am at the increasing number of restrictions on which articles are viewable at the Wall Street Journal.  It used to be part of my daily news read but too little is available today. This is made worse by the fact that unlike most major papers they are not available (or were not, it has been a while since I checked) on LexisNexis so I can't even get it that way.

[Edited for clarity and for errors]

More Musing on Taxes

While I haven't found anything that can directly answer my question on whether the incidence of taxation at the very top of the pyramid makes a difference on growth rates, it has led me to reading some excellent papers on taxes.

A couple of these are available without journal access.  The main one I want to discuss is the OECD paper "Taxes and Economic Growth" which can be downloaded from here.

The first thing I want to mention is that this paper does claim that highly progressive tax brackets are associated with lower rates of entrepreneurship.  However, a quick look at Wikipedia (sufficiently accurate for my purposes here) showed that many states have their top tax bracket kick in well before the very highest income brackets are reached (though I could not easily find data on income by decile for many countries, this is representative of my time commitment rather than lack of data I'm sure).  This is consistent with my earlier hypothesis, that entrepreneurship is concentrated in the top fifth of the distribution but the top 1% (or some subset thereof) is likely acting differently.  Of course, this does weigh against that hypothesis but I don't have data specifically analyzing changing rates at the top 1% so it also does not falsify it.  Perhaps interestingly enough, consulting Saez for the income among the top earners in the US does reveal we are one of the few with an additional bracket (at $372,951) not far off from the $382,600 Saez identifies as the top 1% (these are different years, but I'm lazy and I doubt there has been much change).

There are a few other takeaways from this paper.  First of all, there are strong labor promoting effects (with some costs) for high personal exemptions.  I can personally speak to this, I had worked in both Canada and the U.S. out of my undergrad in fairly low wage jobs and I really noticed the difference in the basic personal amount (or standard deduction in the U.S.).  Here in the U.S. we could gain substantial efficiencies from raising this amount, as well as addressing equity concerns.  It also claims that after tax benefits are far more efficient than using the tax code for this purpose, consistent with other things I've read.

The paper also discusses some other important to consider impacts of income taxes such as reductions in human capital investment since higher income is taxed at a higher rate.  Again though, I think there is a possibility that this result has more to do with taxing the top decile than it does with taxes on the top 1% or so.

The second thing is how much more efficient taxing property is.  The biggest thing here is how negative housing incentives are to growth, it distorts investment and spending in a large number of ways and is very costly to government.  Definitely the single biggest problem problem in most tax schemes.  Very well known but it's nice to have the links spelled out in a format where it can be compared to other taxes.

The second observation here is how efficient estate taxes are, especially if applied at the individual rather than the estate level.  This is also well known so I won't linger.

The third issue related to property taxes is how well capital gains taxes hold up to other means of taxing business holdings.  While there are disadvantages to taxing capital gains relative to other options it looks pretty good.  Ultimately, capital gains are more of a property tax than they are a disincentive to saving.

The paper also points out that corporate taxes are very bad for growth, though considerations involving foreign investment (which the paper mostly considers attracting FDI, for the US though I'm more worried about taxes leaking out, our market is large enough that I'm more concerned about lost income than I am about the need for FDI) and the possibility of people trying to conceal personal income as business income also come into play here.  Still, a simple, low corporate tax rate is worth it for the efficiency gains as long as they are not radically different from other taxes.

Also, consumption taxes are good especially when they are achieving other social ends, such as taxes on pollution and drugs.

My ending thoughts on this?  They haven't changed much, though this paper has made me think a bit more about the negatives of income taxation as well as the potential negatives of too big of a difference between income and corporate taxes.  My ideal tax reform remains eliminating the vast majority of deductions and exemptions, lowering rates overall especially the corporate tax, raising property taxes particularly on housing and capital gains, adding a VAT, adding in more excise taxes particularly on additional drugs such as cannabis as well as on pollution and perhaps soft drinks, instituting a much larger personal exemption, and imposing a higher tax on the top 1%, ideally a smooth upward progressive tax rate (these guys have graphing calculators and can hire accountants so I'm not too worried about the math involved for this particular segment).  Entrepreneurship concerns* are increasingly leading me to think that the progressivity of taxes after the personal exemption can be reduced until the very peak but I wouldn't eliminate it entirely.

*Asset levels are the single largest factor determining new business start ups.  Historical cases lead me to think that new, disruptive (creative destruction) businesses tend to be concentrated in those just below the very top of the income pyramid meaning these individuals should be a focus of particular concern.  However, helping those lower down the scale build up assets is also critical to smaller scale entrepreneurship.  Benefits are probably a bigger deal here.  Providing health care and a greater level of income supports for failed entrepreneurs will help here as well as getting rid of a lot of means testing requirements to help those on the lower rungs who want to take a chance on something like starting a restaurant to do this without also risking their health and benefits as they save up for the initial investment.