There’s been a flurry of pieces on inequality and taxes thanks to new proposals by US politicians, I include the best ones. They range from how Trump tax changes could boost productivity to how immigrants claim less retirement/social security benefits. Some interesting inflation pieces including on using median inflation rates rather than core inflation. A great piece on why the US’s fertility rate is falling (twenty-somethings having less babies and less unintended pregnancies). A piece on ignoring financial TV, another on a new EU policy that could rupture the euro-area and responses to the US’s latest withdrawal from a nuclear arms treaty. Read on…
Tax and Spend
The American tax debate The debate over two different proposals for tax reforms: Senator Elizabeth Warren’s plan for a tax on wealth, and Congresswoman Alexandria Ocasio-Cortez’s plan for a higher top marginal tax rate on income. Bruegel rounds up the thoughts of leading thinkers on this topic. Seems like a lot comes down to how much tax avoidance would happen and how much innovation would be impacted. Great summary piece.
Why Have Other Countries Been Dropping Their Wealth Taxes? Back in 1990, 12 high-income countries had wealth taxes. By 2017, that had dropped to four: France, Norway, Spain, and Switzerland (In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.) Cites the OECD who argue that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax.
Do Immigrants Delay Retirement and Social Security Claiming? The authors use data from the Health and Retirement Study (HRS) to examine how immigrants’ retirement and Social Security claiming patterns compare to those of natives. They find that immigrants are significantly less likely than natives to retire or claim Social Security in their early 60s. They do not find different effects by ethnicity or age of arrival to the U.S.
Taxes, Incorporation, and Productivity Argues that the 2017 US tax package that reduced the tax disadvantage (wedge) of C-corporation entities vs pass-through or S-corp entities could raise productivity. They find that the reduction in the tax wedge since 1968 has expanded overall business productivity by about 4%. The C-corp structure has a productivity advantage as it is a distinct legal entity separate from the owner, corporations can also raise capital through publically traded markets, and earnings can be retained unlike pass-throughs.
Employment Structure and the Rise of the Modern Tax System The paper studies how the transition from self-employment to employee-jobs over the long run of development explains growth in income tax capacity. The author construct a new database which covers 100 household surveys across countries at different income levels and 140 years of historical data within the US (1870-2010). They find increases in employee shares drives expansion of the income tax base. The author also includes study a state-led US development program implemented in the 1950s-60s which shifted up the level of employee share. Using some clever maths, the author finds that the exogenous increase in employee share is associated with an expansion of the state income tax base and an increase in state income tax revenue. This is very relevant for developing countries I imagine.
How Market Power Worsens Income Inequality The highest-income quintile had 77 percent of corporate equity in 1989, and 89 percent of corporate equity in 2016. Meanwhile, superstar firms are capturing increasingly high market shares, allowing them to use their market position to earn excess profits. Given the inequality in stock ownership, market power may continue to increase inequality in the future.
Growth Cycle and Monetary Policy
Low Interest Rates, Market Power, and Productivity Growth Interesting new paper by Atif Mian and Amir Sufi (authors of “House Of Debt”)which argues that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers. This effect strengthens as the interest rate approaches zero. They find that the leading firms are closer to an investment pay-off so when interest rates get close to zero they out-invest smaller forms, which later discourages smaller firms. This eventually leads to greater market power and lower productivity.
How Much Could Negative Rates Have Helped the Recovery? San Fran Fed simulates whether the US economy would have recovered faster had the Fed cut rates into negative territory. They find that “reducing the effective lower bound for the federal funds rate to –0.75% would have reduced economic slack by as much as one-half at the trough of the recession and sped up the ensuing recovery.”
FOMC Communication: What a Long, Strange Trip It’s Been Piece argues that despite market participants complaining about the Fed’s recent about-turn on policy, the Fed is much more transparent than ever before. The piece goes through the evolution of Fed communication from Greenspan (“Since becoming a central banker, I have learned to mumble with great incoherence”) to now.
The Puzzle of the US Productivity Slowdown Refers to the US CBO’s recent outlook and its comments on productivity growth. Seems like the CBO can’t quite pin-point why it has fallen so much since 2005. It runs through the usual arguments of measurement issues, slower growth/investment, poor education, over-regulation and lack of innovation.
Unemployment is low only because ‘involuntary’ part-time work is high 25% of all British workers are currently only working part-time. Much of those are “involuntary” part-timers (ie they would prefer a full-time job). If they were classified as “unemployed” then the UK’s unemployment rate would go from 4% to 7%.
Is Inflation Just Around the Corner? The Phillips Curve and Global Inflationary Pressures
Paper finds that an expectations-augmented Phillips curve for the US and other countries does hold (unlike the classical Philips curve). The trick is to find surveys of inflation expectations. Given this relationship, they find implied slack was pushing inflation below expectations in the years after the Great Recession. But the global and U.S. inflation gaps have shrunk in recent years thus suggesting tighter economic conditions, but not enough to suggest inflation will break out. The sustained deflationary pressures following the Great Recession have abated, though.
The Nonpuzzling Behavior of Median Inflation The authors argue that rather than using core inflation (headline ex food and energy) it is better to use a weighted median of industry inflation rates. This weighted median is less volatile than the traditional measure of core inflation, because it filters out large price changes in all industries. They illustrate the usefulness of the weighted median with a case study of inflation in 2017 and early 2018 (when core dipped and the Fed panicked, meanwhile the median measure did not). They also show that a Phillips curve relating the weighted median to unemployment appears clearly in the data for 1985-2017, with no sign of a breakdown in 2008.
The link between labor cost and price inflation in the euro area ECB finds that there is a link between labor cost and price inflation in the euro area (unlike in the US). They use country and sector quarterly data over the period 1985Q1-2018Q1 and find a strong link between labor cost and price inflation in the four major economies of the euro area and across the three main sectors. They show that it is more likely that labor costs are passed on to price inflation with demand shocks than with supply shocks. However, the pass-through is systematically lower in periods of low inflation as compared to periods of high inflation. These results confirm that, under circumstances of predominantly demand shocks, labor cost increases will be passed on to prices. Coming from a period of low inflation, however, this pass-through could be moderate at least until inflation stably reaches a sustained path.
58 Episodes of Hyperinflation (Venezuela is #23) Venezuela. It ranks as the 23rd most severe. Today, the annual rate of inflation is 120,810%/yr. While this rate is modest by hyperinflation standards, the duration of Venezuela’s hyperinflation episode, as of today, is long: 27 months. Only four episodes of hyperinflation have been more long-lived.
Finance, Data, Technical Stuff
Should You Ignore Financial TV? Has a chart of how many bears regularly come on TV. And amazes the author is “not just how wrong they have all been, but for some of them, how many times they have been wrong and still keep trying to “get it right.” “. Gulp, I come on TV.
Liquidity and Exchange Rates: An Empirical Investigation Intriguing paper written by Prof Engel who argues that a measure of liquidity in government bonds correlates well with FX (so more liquid bond markets would see stronger FX). This implies that lower yields are not necessarily bad for FX
Average Crossing Time: An Alternative Characterization of Mean Aversion and Reversion
Clever paper that reframes the mean reversion or not debate in finance, where equities are thought to mean-revert around some fundamental ratio, while bonds tend not to (or as the authors say they mean avert). They argue that stationarity and mean reversion are not necessarily the same thing and so the mean reversion/aversion distinction could be largely artificial. They propose an alternative measure, the ‘Average Crossing Time’ that both unifies these concepts and provides an alternative characterization. Ceteris paribus, mean reverting processes have a relatively shorter average crossing time as compared to mean averting processes.
Artificial intelligence, algorithmic pricing, and collusion Antitrust agencies are concerned that the autonomous pricing algorithms increasingly used by online vendors may learn to collude. This column uses experiments with pricing algorithms powered by AI in a controlled environment to demonstrate that even relatively simple algorithms systematically learn to play sophisticated collusive strategies. Most worrying is that they learn to collude by trial and error, with no prior knowledge of the environment in which they operate, without communicating with one another, and without being specifically designed or instructed to collude.
Evolving Measurement for an Evolving Economy: Thoughts on 21st Century US Economic Statistics Nice survey data issues from declining responses to surveys to missing new segments of the economy. Discusses data measurement issues in different sectors like healthcare as well as a future of using more online data, web scraping and better data collection.
Demographics and Climate Change
Importing Inputs for Climate Change Mitigation: The Case of Agricultural Productivity IMF finds new evidence that, within low-income countries, those with a higher import component of intermediate inputs seem to be more shielded from the negative impacts of weather shocks.
Fertility Trends in the United States, 1980-2017: The Role of Unintended Births The U.S. fertility rate reached a historic low in 2017. However, aggregate trends in fertility mask substantial heterogeneity across different demographic groups. Young women and unmarried women have seen the largest declines in fertility in recent years while women older than 30 and married women have actually experienced increases. The authors finds that changes in unintended births help explain fertility patterns in the U.S. from 1980 to 2017. They find that 35% of the decline in fertility between 2007 and 2016 can be explained by declines in births that were likely unintended, and that this is driven by drops in births to young women.
The European Commission’s Taxing New Idea Former Chief Economist of the ECB doesn’t like the EU’s new tax initiative: “The European Commission is proposing that EU tax policies be subjected to qualified-majority voting just when the balance of power in the bloc is about to shift decidedly to the southern member states. That would set the stage for a rebellion among northern members, which will have effectively lost fiscal sovereignty.” (First I’ve heard of this, and it could be something that could increase chances of a euro break-up)
Jens Weidmann: The future of the European monetary union President of the Bundesbank and possible future ECB President gives his view on Germany : “the stream of bad news from Germany’s economy might well continue for some time to come. And contrary to our December forecast, the dip in growth looks set to continue into the current year.”, on the ECB policy “Whatever happens, the normalisation process will probably take a number of years, which is all the more reason not to squander any time. You see, monetary policymakers need to regain more leeway to be in a position to respond to an unexpected economic slump.” And on government debt “The sovereign-bank nexus thus needs to be severed once and for all in order to pave the way for a single deposit guarantee scheme. Banking regulation lies at the heart of the problem. Up to now, government bonds have been given preferential treatment over loans to the private sector and households.”
Select Reactions to the INF (Intermediate Range Nuclear Forces) Treaty Crisis The Trump administration move to exit the treaty due to perceived Russian violations has caught many surprise. This article pulls together reactions from governments around the world. Merkel reacted by saying “It is clear to us that Russia has violated this treaty… The important thing is to keep the window for dialogue open.”, NATO: “We need to make sure that we have effective credible deterrence, but not necessarily mirroring exactly what Russia does. “ and UK “[W]e want the INF Treaty to continue and to be a successful treaty”
All Things China
Reports of Belt and Road’s Death Are Greatly Exaggerated Don’t Underestimate China’s Resilience
Foreign businesses fret as China fast-tracks investment law The law will eliminate the requirement for foreign enterprises to transfer proprietary technology to Chinese joint-venture partners. But “Foreign businesses worry the draft glosses over details and that vague language leaves room for broad interpretation. For example, it gives China the right to expropriate foreign investment “for the public interest”, which foreign business groups fear could be abused.”
The US and China—more alike than you think “When the [US] export controls notice was released, US technology lobbyists in Washington were at pains to explain that they were at risk of losing access to a big market [China] for their new products, and of losing the ability to share information with Chinese researchers, which could help them develop more cutting-edge products.” “In some respects (including certain cultural traits such as embracing creative destruction), the US has a more in common with China than it does with Japan or Europe. Consider the list of the world’s top 20 internet companies:
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