The Unlimited Wealth Gains from Transfer Payments

Gary Burtless writes,

For middle-income families, tax cuts and higher government benefits erased almost 90% of the market income losses caused by the recession. For Americans with lower incomes the combination of tax cuts and more generous benefits offset virtually all the market income losses. Millions of laid off workers were clearly made worse off by the recession. But income replacement through the permanent tax and transfer system plus temporary measures to boost families’ spendable incomes achieved their intended goal. For poor and moderate-income families, wage and capital income losses caused by the recession were largely or wholly offset by tax cuts and benefit increases.

Pointer from Mark Thoma.

When someone’s analysis is contrary to what one believes, the overwhelming temptation is to nit-pick the methodology. I try to restrain myself, but in this case I cannot.

What Burtless demonstrates is that the government wrote checks. Did anyone ever question that?

What some of us questioned was the macroeconomic impact of those checks. If you believe that government can manufacture wealth by writing checks, then a zillion dollar combination of tax cuts and transfer payments would make the American people a zillion dollars better off. Seeing that this is absurd, one might want to go back and think more carefully about the macroeconomic analysis.

I am not saying that macroeconomic analysis definitely proves that the stimulus failed. But I fail to detect in Burtless’ piece any contribution to the discussion.

Capitalist Tentacles

From Fortune,

Founded in 2006, the company has grown to 1,200 employees and operates in 40 countries. With 11 billion page views, 25 million listings, and 8.5 million transactions per month, it is the largest marketplace in India, Poland, and, as of last year, Brazil. Funded by U.S. venture firms including Bessemer Ventures and General Catalyst Partners, OLX sold a majority stake to the African conglomerate Naspers in 2010.

This story made me feel good. I thought I would pass it along.

William Galston’s Growth Proposals

He writes,

Here’s a simple, easily administered proposal along these lines: a five-year reduction in Social Security payroll rates — by 3 percentage points during the first three years, phasing down to 2 points in the fourth year and 1 point in the fifth. (General revenues would fill the gap in the Social Security trust fund, protecting current and future beneficiaries.) A Joint Economic Committee report on the effects of the 2012 payroll tax cut suggests that the proposed five-year reduction could increase growth by 0.75 percent during each of the first three years while increasing net jobs by 600,000 annually during that period.

I have been advocating cuts in the payroll tax for six years.

And here is another interesting proposal:

If everybody were required either to purchase insurance against the possibility of nursing home care or to save for that eventuality, states could be relieved of the long-term care burdens for which they now pay in the Medicaid program.

Is Demography (Economic) Destiny?

The Economist blog writes,

An ageing population could hold down growth and interest rates through several channels. The most direct is through the supply of labour. An economy’s potential output depends on the number of workers and their productivity. In both Germany and Japan, the working-age population has been shrinking for more than a decade, and the rate of decline will accelerate in coming years (see chart). Britain’s potential workforce will stop growing in coming decades; America’s will grow at barely a third of the 0.9% rate that prevailed from 2000 to 2013.

Pointer from Tyler Cowen.

Along seemingly similar lines, Karl Smith writes,

It’s no accident that this phenomenon appeared in Japan first. As its population began to stagnate well before the rest of the industrialized world, investors found themselves with loads of capital, a dearth of workers, and repayment terms they could not meet.

First, think about this in the absence of inter-generational transfer schemes like Social Security.

1. If people live longer than they used to, then they either have to produce more (probably by retiring later) or consume less.

2. If birth rates decline, then you let capital depreciate faster than it would otherwise. Think of an economy where the only capital goods are houses that stay in good condition for fifty years. When birth rates are rising, you need to keep using some houses longer than fifty years, even though they no longer are in good condition. When birth rates are falling, you can take some houses out of service before fifty years, even though they still are in good condition.

This seems quite straightforward to me, and it is does not suggest that demographic changes should be highly disruptive. I am not persuaded by just-so stories about Japan. One can conjure many such stories. For example, maybe Japan slowed down because its corporatist approach to capital allocation was only effective for a decade or two.

Casey Mulligan on Obamacare Tax Effects

He said,

In summary, the ACA has three major taxes in it. Two are taxes on full-time employment and the other is a tax on income. They may be implicit, they may be hidden, politicians may not call them taxes, but that’s what they are. Their economic impact on workers varies widely, affecting low-skill workers the most. They create all kinds of productivity problems and will have visible and permanent effects on the economy. I have estimated that employment will be three percent less over the long term because of the ACA, and that national income—or GDP, if you like to think of it that way—will be two percent less. If you look at the productivity costs alone—forgetting the fact that there will be a number of people not working anymore—they come to $6,000 per person who gets health insurance because of the law. And I’m not beginning to count the payments needed for health care providers.

Pointer from Don Boudreaux.

Ryan Avent on Urban Housing Supply

He writes,

Housing is more costly in the most expensive cities because so little of it is built. In the 2000s, Houston’s housing stock grew by more than 25 percent while that in the Bay Area grew just over 5 percent. In 2013 Houston approved 51,000 new homes while San Jose okayed fewer than 8,000, despite the booming Silicon Valley economy. Glaeser and Kristina Tobio find that since the 1980s, the extraordinarily rapid growth in the population of Sunbelt cities is due primarily to the receptiveness of those cities to new construction. A strengthening economy in places like Texas and Georgia leads to a construction boom and rapid population growth, while economic booms in coastal cities lead to very little population growth but soaring housing costs.

More Q where construction is allowed, higher P where it is not. Read the whole thing.

The Year of Flawed Books

Writing a “best books of the year” post for 2014 means choosing among flawed books.

Six months after Piketty’s Capital made its splash with the “law of capitalism” that r>g, we have Pikettarians saying that, of course, Piketty never said that r>g explains the rise in inequality in recent years that concerns everyone, and in fact anyone who thinks he said that is a knave who has not read the book. I was among the many who never made it through Capital (it gave a new and different meaning to the expression “widely unread”), so I will take it on faith that the whole r>g thing was a head fake. Anyway, Capital does not make my list.

I think that number 1 is Complexity, by David Colander and Roland Kupers. On many pages, I highlighted insightful passages. On many other pages, I highlighted irksome passages. Look for a longer review from me next year.

Probably number 2 is Trillion Dollar Economists, by Robert Litan. It is a great achievement, but even so I wanted a different book.

Number 3 might be Isabel Sawhill’s Generation Unbound, about the pathology of unwed motherhood (it’s not just for teenagers any more) and what to do about it. However, I think that the question of whether “society” should be trying to prevent births of a certain type (namely, from unplanned pregnancies) is more difficult than she makes it out to be. Again, I have a review forthcoming.

Number 4 might be Charles Calomiris and Stephen Haber, Fragile By Design. The financial crisis continues to stimulate books on banking and related topics, and of the recent lot I thought this one had the strongest historical and international perspective. However, in the end, I found its main thesis, that U.S. banking policy is hindered by populism, unpersuasive.

Number 5 might be Mark Robert Rank, PhD, Thomas A. Hirschl, PhD, and Kirk A. Foster, PhD, Chasing the American Dream, which provides a good empirical study of income dynamics using longitudinal data.

Finally, there is a category of books written by friends of mine, in which I recommend Russ Roberts’ How Adam Smith Can Change Your Life, Megan McArdle’s The Upside of Down, and Elizabeth Green’s How to Build a Better Teacher.

UPDATE: Here is Tyler’s list.

The End of Wallets?

Joshua Gans writes,

the main reason I carry a wallet is not because of convenience per se but because it previously represented the way by which I would be identified. Possession was my credo. Having cash identified that I had done something legitimate to acquire that cash and a right to acquire more goods and services with them. Having a card allowed my bank to verify that I had those rights. Now, I could do the same with just a phone. Moreover, the retailer wouldn’t need to do anything other that see an acknowledgment that the ‘black box’ had accepted my credentials.

Imagine a world in which you use biometric ID to authenticate yourself to your phone or watch. In principle, then, you do not need any other forms of identification to enter your work building, purchase something, confirm your identity to authorities, and so on.

Note that I would like the Multi-purpose Savings Accounts (my current name for my negative income tax proposal) to incorporate this sort of technology to the extent possible.

Some questions:

1. What would this do to illegal immigration? Would there be a way to give someone a phony social security number or other ID?

2. Would the potential to use technology to prevent voter fraud be permitted to be used?

3. How dystopian is it for people not to be able to hide their identities?

4. As commenters here have pointed out, your “biometric ID” ultimately is represented as a string of bits. What sort of security system would you need to address this?

5. Do you think people would be able to get along without digital ID, or even be permitted to do without?

Feel free to ask your own question.

Steve Teles Hearts the Koch Brothers

He writes,

It may be impossible to organize a broad, deeply mobilized grassroots coalition against upward-redistributing rent seeking. But in most cases, equaling the manpower and resources of the rent-seekers isn’t necessary — just making sure that there is someone on the other side can make a big difference. Perhaps perversely, it may be that the only answer to the problem is for the wealthy themselves to bankroll organizations that would change the political calculus that makes acceding to the demands of rent-seekers logical for politicians.

Which is what the Koch brothers do. And I could also give a shout-out to the Tea Party members of Congress, who are much more reliably hostile to wealthy interest groups than are either the Democrats or the Republican establishment.

Knowing Teles, I don’t think that he had the Koch brothers or the Tea Party in mind as solutions to the problem of crony capitalism. But I they do fit his model.

Teles is a contributor to the Cato growth forum. Another contributor, Derek Khanna, writes

One could imagine a benefit to having emerging companies pay less in taxes to help foster creative destruction; instead, U.S. policy is the opposite. Big companies have enough loopholes and lobbyists to ensure that they rarely pay the actual corporate income tax rate. The only companies that pay our full corporate income tax rate, the highest corporate tax rate in the entire world, are new companies.

Both Teles and Khanna cite patent and copyright policy as skewed in favor of special interests.

Family Structure and Income Inequality

Aparna Mathur writes,

Recently, some papers have suggested that assortative mating has a role to play in household income inequality. Empirically, it has been found that the proportion of couples who share the same level of schooling has been growing over the past few decades. This has been accompanied by a rise in household income inequality. A paper by economists at the Federal Reserve Bank found that changing family structure accounted for 52 percent of the increase in the 50-10 ratio (50th percentile to 10th percentile) and 49 percent of the increase in the 95-5 ratio. Research by Harvard economists, Chetty et al. concludes that the single strongest correlate of upward economic mobility across geographic regions of America is the fraction of children living in single-parent families.