The World’s Income Distribution, By Country

GDP per capita, using PPP:

Via bookofjoe (not his usual thing either).

Why Is Eastern Europe Poorer?

Eastern Europe is generally poorer than Western Europe. This is a problem in an age of common migration because the educated and talented are migrating from Eastern to Western Europe. There’s a brain drain.

New research shows that this goes back about 1,000 years.

When you go back that far, you need to use to use a proxy for human capital. Keywood and Baten use “elite numeracy”. What they record is the frequency with which different countries were capable of recording the date of the birth of the child who later become the ruler. This is an indicator of understanding that some numbers will become important later on and needs to be recorded now.

What they found was that before 1000 A.D., elite numeracy was about the same across Europe (and probably not very good). But after that, and until about 1800 A.D., Western Europe took a large and sustained lead in elite numeracy. They then show that this divergence was related to military threats. In short, leaders in Eastern Europe were scared, and put their money into defense of, rather than education of, their elites.

The macroeconomic patterns we see in the world today may be very old indeed.

Inequality

We have some techniques for measuring the degree of inequality. For example, use of the Gini coefficient is becoming quite widespread. This is useful for thinking about whether the distribution of something is more unequal or less unequal than some other distribution. It isn’t perfect, but it’s a start.

Unfortunately, our mental heuristics† for assessing inequality have not caught up. On the face of it, equality corresponds to a single value of the Gini coefficient, zero, while inequality applies to all other values greater than zero and less than or equal to one (the coefficient is defined over 0 to 1). The thing is, these are point estimates. So, the probability of any distribution’s Gini coefficient hitting any value exactly is … zero. In some sense, we’re never likely to find equality (which is a fairly useful property if you like to complain about the pervasiveness of inequality).

In economic situations the typical heuristic is that the world we observe is too unequal because there are monetary/political/legal/social/cultural forces that have pushed us away from equality, and are capable of sustaining distance between how unequal things are and how equal we’d like them to be.

Now, let me modify that third paragraph with the implication of the second paragraph to get:

In economic situations a more realistic heuristic is that the world we observe is too unequal because there are monetary/political/social/cultural forces that have pushed us away from some more natural level of inequality, and are capable of sustaining distance between how unequal things are and how unequal we can reasonable expect them to be. [I’ve emphasized the modifications between the two paragraphs].

My point in this is that we can still be concerned about inequality while we go and explore the world for how much inequality is actually OK. That’s a premise that lots of people haven’t really considered, but it’s essential for things like, say music, where the inequality of tastes is what makes it worthwhile.

So, where to start? How about with “A Comparison of Wealth Inequality In Humans and Non-Humans”. The paper is behind a paywall, but this is excerpted from the abstract:

In many societies, the statistical distribution of wealth takes a characteristic form: unimodal, skewed to the right, and fat-tailed. …  we present the first description of inequality in material resources in an animal population … the shell distribution for the [hermit] crabs strongly resembles the characteristic form of wealth distribution in human groups. The amount of inequality in the crabs is more than that in some small-scale human groups but less than that in nations. We argue that the shell distribution in the crabs is not simply generated by biological factors such as survival and growth of either crabs or gastropods. Instead, the strong resemblance in the human and hermit crab distributions suggests that comparable factors, not dependent upon culture or social institutions, could shape the patterns of inequality in both groups. …  We also propose that inequality in hermit crabs could provide a baseline for examining human inequality.

For those of you that don’t know, hermit crab exoskeletons are not very serious defensive shells, so they move into harder shells of other creatures that have died. The crabs ability to grow is based on finding a shell that is big enough for them to grow into, but small enough for them to still maneuver. Since mollusks do not stop growing as they age, a hermit crab may go through several shells in its lifetime. Basically, their success as individuals is based on finding natural resources and using them in a rivalrous and excludable manner. And they result is inequality.

Sounds a lot like humans … except that there aren’t monetary/political/legal/social/cultural forces making it happen. This suggests that equality is not the null hypothesis we should be using for assessing human affairs.‡

† Heuristic is a good college level word that you should look up.

‡ Kurt Vonnegut’s short story “Harrison Bergeron” is a satirical look at what might happen if we did.

New Macro Dataset

This morning the BEA released the first county-level GDP data for the U.S. Here’s the news release, and here’s where to find all the numbers.

Annual data is provided for four years, 2015-18.

The GMP (Gross Metropolitan Product) data series will be discontinued. Now you can slice and dice that at the county level if you don’t like the official definitions of metro areas. I do wish the data, as released, had filters for the metro areas.

What trivia did I spot?

• There appear to be 3,112 county entries. This does not match up with the number of counties in the U.S. Still trying to figure out what’s missing.
• There are some entries for independent cities and combination entities (independent cities and their surrounding counties) from Virginia. This makes the undercount above more severe. Again, not a biggie, but I have to figure it out.
• My own small county in rural, southwestern Utah, has a GCP of $1,500M (larger than about 2 dozen countries).
• The smallest county is Issaquena in Mississippi with a GCP of just over $18M.
• The largest is Los Angeles (County) at $711,000M. Its’ just a tad smaller than Pennsylvania, and larger than 44 states.
• New York County, basically Manhattan, has a GCP of $600,000M. I was surprised at how large that is relative to the other boroughs of New York: Kings County (Brooklyn) and Queens are about $85,000M. The Bronx and Staten Island are far smaller. Nassau and Suffolk in the suburbs is about the same size.
• Salt Lake County, where I once lived, which is about half the metropolitan area comes in at $81,000M
• Orleans Parish, where I once lived, it down to $23,000M. It’s not even the largest parish in the state anymore. Even with the surrounding parishes added in, New Orleans is now far smaller than Utah’s Wastach Front.
• Erie County, New York, where I grew up, comes in at $51,600M.
• I also lived for two years in Tuscaloosa County, Alabama. It’s at $8,600M

Infographic: The World’s Money and Markets

This is good but not great. (All my comments are up here because the image is so large, here is the original in its own web page with comments). I have 3 big complaints. There’s also a fourth group of stuff to love because we don’t often see it elsewhere.

• There’s some crossover between different categories, so some things are double-counted. Some examples are:
• Several of the “Biggest Companies” biggest shareholders are listed in the “50 Richest People”.
• The “Fed’s Balance Sheet” includes the USA sub-category under “Currency”. And BTW: which side of the Fed’s balance sheet is shown there, or is it both (or do the visualizers not have that straight in their own heads?)
• There’s some mixing of stocks and flows. For example:
• The category “50 Richest People” (in the world) is followed by “California’s GDP”. But the former is a stock and the latter is a flow. A way to think about this is that they are related by a rate of return. Assume that’s 10%/year to make things simple. Thus, the flow of income coming of the wealth of the 50 richest people is about 2 blocks. When compared to the flow of California’s GDP of 26 blocks (yes, there’s a mistake in the chart there) it doesn’t look so big. Even better, California’s flow of GDP is generated by a stock of wealth that’s 10 times as big, so an appropriate comparison is the 19 blocks for the “50 Richest People” to the 260 blocks of wealth in California.
• But that comparison is insightful because the size of the sub-category “United States” under “Stock Markets” is only 73 blocks. Figure about 10 of those are in California. So somehow, California has 260 blocks of wealth of which just 10 are the market’s net worth of corporations. This tells us that most of what is productive in our world is not in corporations, which begs the question of why on earth so many politicians are so concerned with limiting them.
• They need to be careful about what are assets, what the liabilities are, and what net worth (the difference between the two) is. For example:
• They only have some portions of assets listed (e.g., “Gold”, “Currency”) but then they show a much more inclusive and comprehensive “Global Debt” category. This makes debt look too large.
• They also show capitalization of “Stock Markets” which is a net figure. What are the assets and liabilities associated with that?
• The same thing goes for derivatives. They talk about the zero-sum nature of most of those, but they don’t actually show it.
• This is a good example of the “balanced reporting” and “what passes for expertise” problems from my Why Is Macro So Hard lectures. In the sidebar about derivatives, they quote Dr. Richard Sandor (why does he get a title if it isn’t important to the position he takes?), Warren Buffet, and Jeff Greene. So what you have there is a guy who markets derivatives, a guy who’s rich mostly from non-derivatives, and a guy who got rich from derivatives. Any expertise there on the history of derivatives, why we have them, or why they’re useful??
• Most people who are buggy about money being backed by something think it has to be gold (in Fort Knox!!). The sub-category “Central Banks & IMF” shows how small that component actually is.

Courtesy of: Visual Capitalist, via Newmark’s Door.

Some Theory of Wealth Taxation

Mirlees is the basis for a lot of how economists think about taxation (he won a Nobel Prize for this body of work in 1996). Famously, while he was a supporter of the Labour Party in the UK, and generally what we would now call progressive, he believed his own results on taxes. Namely that most forms of corporate or capital taxation were a bad idea, and that rates are best kept at zero.

Of course, that doesn’t work politically in most places.

Kocherlakota published an article in 2003 in Econometrica expanding on Mirlees work. It’s one of the basic theoretical papers in taxation.

He set up a model with the following features:

• Agents have skills that determine their income.
• Agents can save, and can finance consumption out of wealth if needed.
• Skills evolve through time with persistence, sometimes getting worse; but you’re self-insured to the extent that you saved something.
• The government is interested in providing a social safety net to the income-poor by taxing the wealth-rich, and redistributing the proceeds as income to the needy.

In this framework, what would the optimal wealth tax look like? The answer is anything but what politicians commonly propose.

• The expected tax rate that an agent expects now on the wealth they may have in the future … should be zero.
• The gross amount of total tax revenue collected on wealth … should always be zero.
• But, the actual tax rate that an agent should face on their wealth once they accumulate it … should be decreasing in their consumption.
• The dispersion of tax rates on wealth between the wealth-rich and wealth-poor should be bigger if the government is bigger.

If you told that to anyone in D.C. (or any other capital) they’d think you were nuts. It means the wealthy should be subsidized, and the not-so-wealthy should be taxed. Further, that should be accentuated when the government is bigger (as they pretty much all have done over the last century).

Economists anger people by pointing out unintended consequences. And there’s a doozy in the framework established by that first set of bullet points (which honestly seemed pretty plausible when you first read it, right?).

It turns out that the dominating effect comes from people who are wealthy now, and who suffer a negative skill shock in the future, so their income drops. Their optimal choice is to … stop working completely … collect the government’s welfare support … and keep their nest egg relatively untouched.

Does this sound like any seniors you know? Wealth rich, income poor, choosing not to work because they have relatively more aches and pains than other seniors, and receiving checks from the government?

Before you complain, let’s look at how an optimal wealth tax might differ from the one’s we have or might have. Current wealth taxes (and those proposed) simply take a percentage of wealth. What Kocherlakota is saying is that you can and should take a fraction of wealth, provided that you adjust that for current income; you take more from someone with low income because they might be a slacker, and you take less from those with high income because you know they’re probably supporting the government more with the high income taxes they pay.

Do note that we already do something like this in certain situations. For example, many welfare programs have asset tests. No one likes this, but in practice this is what is happening when an old person with a home needs to go into a nursing home, and the government requires that the home be sold and the proceeds used up before they’ll start covering the cost of the nursing home. In short, if you self-insured, the wealth tax rate should function to make sure that you use your self-insurance when it’s needed.

The paper is not required. It appeared in Econometrica, which is one of the toughest journals. And the author, Narayana Kocherlakota, has been a top macro theorist at theory-heavy schools for most of his career. By all means check it out, but don’t make yourself feel bad just because you’d need years of math and theory classes to get it all (when all boiled down, the model is 58 equations and 58 unknowns).

Some Politics of Wealth Taxation

Taxing wealth seems to be on the policy table in this U.S. election cycle. This is arguably the most serious move in this direction in about 70 years.

Of course, we already do have some forms of wealth taxation. Owners of real estate pay property taxes. Estate taxes claim a portion of large inheritances. And capital gains on assets are taxed when the gains are realized at sale.

The proposals this year, made by candidates Sanders and Warren, are far broader. They are analogous to property taxes, in that they will be paid on some guess of value (since the value of an asset is only an estimate until it actually changes hands). However, the base for the taxes is widened to most assets. There is some question about tangible vs intangible assets: stocks owned will be a lot easier to value than say, a copyright or patent.

Wealth taxes have been tried in a number of places, primarily in western Europe. And the history of the last few decades has been that they’ve been slowly dissassembled as impractical, unworkable, and not capable of raising that much revenue.

Nonetheless there is a strong impetus for such taxes, largely driven by the research of Piketty, Saez, and Zucman. I don’t care to discuss those much in this post; suffice to say they have documented a large increase in the portion of wealth held by the richest people, across countries, going back about 40 years. Their worry is that societies did a good thing in reducing the portion of wealth held by the rich in the decades prior to that, and that the rich are using the political process to turn the tide in the other direction, and perhaps to re-cement their new gains into permanence. That is a separate issue from whether or not a tax on such gains is feasible.

For this post, I bring your attention to a recent paper by Glennerster entitled “Why was a wealth tax for the UK abandoned?: lessons for the policy process and tackling wealth inequality”. He discusses the UK experience in the 1970’s.

A couple notes about politics are in order. First, the UK has a parliamentary system. This would be analogous to a U.S. system if the Speaker of the House (Nancy Pelosi) was President, the Senate was far weaker, and the judicial system was not co-equal to the other branches. Second, the two largest political parties in the UK are more extreme than those in the U.S. The Conservative party is fairly close to the Republican party here, but the Labour party there is left of our Democratic party.

The backstory is that the Labour Party had contemplated a wealth tax for a long time. Through the 20th century, they had been disappointed with the revenue collected with high rates through an estate tax. Beginning in the 1950’s they started to discuss taxing wealth before death rather than at death. This came to a head in 1974 when the Labour Party included a wealth tax in the platform it used to successfully win the general election. Now they were in a position to enact the tax rather than crow about one, and that’s when the problems began.

Initial public complaints came from farmers, city-dwellers who owned country houses, and private art collections. This was followed by worries about international flights of capital (basically, the rich moving elsewhere). To some extent this was already happening in the UK, which required a bailout from the IMF in 1976 to stabilize the value of the pound.

N.B. The article does not mention this, but that was a topic of some interest in the U.K. in the 1970’s. This was the period when many rock musicians (e.g., members of The Beatles, The Rolling Stones, and Pink Floyd, David Bowie, the entire bands Jethro Tull and Bad Company, Tom Jones, Cat Stevens, Rod Stewart), movie stars (e.g., Roger Moore and Michael Caine), and television personalities (e.g. David Frost, and members of the Monty Python troupe) decamped (primarily to the U.S. and France) to avoid high income tax rates.

Ultimately the wealth tax proposal was not even brought to a vote. It died in committee meetings of presumable supporters. What went wrong? Glennerster quotes Denis Healey’s memoirs and synthesizes (Healey was analogous to Secretary of the Treasury in the UK during the 1970’s):

Denis Healey’s own reflective conclusion was that it was a mistake. ‘Another lesson was that you should never commit yourself in Opposition to new taxes unless you have a very good idea how they will operate in practice. We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.’ (Healey 1989, p404) It seems clear that the Labour Party never considered in any detail the administrative costs and practical complications involved in assessing individuals’ wealth on a regular basis. It was enough to say, as Labour Party Research Department papers did, that other countries levied such taxes so it must be possible. The several thousand civil servants needed, depending on the valuation level at which the tax began, the numerous regional offices required and the process of regular valuation that might fall on individuals came as a surprise to the politicians and, indeed, to the Treasury when it got to think about the question properly. [emphasis added]

…

One lesson to be drawn from the 1974 experience is that the administrative detail in taxation matters a lot. The idea still lacks detailed study. The second lesson is that tax changes that are likely to affect major sections of the population and the wider economy have to be widely debated before, rather than after, any party reaches power.

This is rather an amazing conclusion for the U.S. going into the 2020 election. As we saw in 2016, the unusual thing about U.S. presidential elections is the extent to which they can bring groups into the White House with little or no policy experience. The huge distinction is that in the UK almost everyone brought into power had policy experience, and not only could they not pull it off, but they abandoned the idea as unworkable.

Via Marginal Revolution.

Some Politics of Wealth Taxation

Taxing wealth seems to be on the policy table in this U.S. election cycle. This is arguably the most serious move in this direction in about 70 years.

Of course, we already do have some forms of wealth taxation. Owners of real estate pay property taxes. Estate taxes claim a portion of large inheritances. And capital gains on assets are taxed when the gains are realized at sale.

The proposals this year, made by candidates Sanders and Warren, are far broader. They are analogous to property taxes, in that they will be paid on some guess of value (since the value of an asset is only an estimate until it actually changes hands). However, the base for the taxes is widened to most assets. There is some question about tangible vs intangible assets: stocks owned will be a lot easier to value than say, a copyright or patent.

Wealth taxes have been tried in a number of places, primarily in western Europe. And the history of the last few decades has been that they’ve been slowly dissassembled as impractical, unworkable, and not capable of raising that much revenue.

Nonetheless there is a strong impetus for such taxes, largely driven by the research of Piketty, Saez, and Zucman. I don’t care to discuss those much in this post; suffice to say they have documented a large increase in the portion of wealth held by the richest people, across countries, going back about 40 years. Their worry is that societies did a good thing in reducing the portion of wealth held by the rich in the decades prior to that, and that the rich are using the political process to turn the tide in the other direction, and perhaps to re-cement their new gains into permanence. That is a separate issue from whether or not a tax on such gains is feasible.

For this post, I bring your attention to a recent paper by Glennerster entitled “Why was a wealth tax for the UK abandoned?: lessons for the policy process and tackling wealth inequality”. He discusses the UK experience in the 1970’s.

A couple notes about politics are in order. First, the UK has a parliamentary system. This would be analogous to a U.S. system if the Speaker of the House (Nancy Pelosi) was President, the Senate was far weaker, and the judicial system was not co-equal to the other branches. Second, the two largest political parties in the UK are more extreme than those in the U.S. The Conservative party is fairly close to the Republican party here, but the Labour party there is left of our Democratic party.

The backstory is that the Labour Party had contemplated a wealth tax for a long time. Through the 20th century, they had been disappointed with the revenue collected with high rates through an estate tax. Beginning in the 1950’s they started to discuss taxing wealth before death rather than at death. This came to a head in 1974 when the Labour Party included a wealth tax in the platform it used to successfully win the general election. Now they were in a position to enact the tax rather than crow about one, and that’s when the problems began.

Initial public complaints came from farmers, city-dwellers who owned country houses, and private art collections. This was followed by worries about international flights of capital (basically, the rich moving elsewhere). To some extent this was already happening in the UK, which required a bailout from the IMF in 1976 to stabilize the value of the pound.

N.B. The article does not mention this, but that was a topic of some interest in the U.K. in the 1970’s. This was the period when many rock musicians (e.g., members of The Beatles, The Rolling Stones, and Pink Floyd, David Bowie, the entire bands Jethro Tull and Bad Company, Tom Jones, Cat Stevens, Rod Stewart), movie stars (e.g., Roger Moore and Michael Caine), and television personalities (e.g. David Frost, and members of the Monty Python troupe) decamped (primarily to the U.S. and France) to avoid high income tax rates.

Ultimately the wealth tax proposal was not even brought to a vote. It died in committee meetings of presumable supporters. What went wrong? Glennerster quotes Denis Healey’s memoirs and synthesizes (Healey was analogous to Secretary of the Treasury in the UK during the 1970’s):

Denis Healey’s own reflective conclusion was that it was a mistake. ‘Another lesson was that you should never commit yourself in Opposition to new taxes unless you have a very good idea how they will operate in practice. We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.’ (Healey 1989, p404) It seems clear that the Labour Party never considered in any detail the administrative costs and practical complications involved in assessing individuals’ wealth on a regular basis. It was enough to say, as Labour Party Research Department papers did, that other countries levied such taxes so it must be possible. The several thousand civil servants needed, depending on the valuation level at which the tax began, the numerous regional offices required and the process of regular valuation that might fall on individuals came as a surprise to the politicians and, indeed, to the Treasury when it got to think about the question properly. [emphasis added]

…

One lesson to be drawn from the 1974 experience is that the administrative detail in taxation matters a lot. The idea still lacks detailed study. The second lesson is that tax changes that are likely to affect major sections of the population and the wider economy have to be widely debated before, rather than after, any party reaches power.

This is rather an amazing conclusion for the U.S. going into the 2020 election. As we saw in 2016, the unusual thing about U.S. presidential elections is the extent to which they can bring groups into the White House with little or no policy experience. The huge distinction is that in the UK almost everyone brought into power had policy experience, and not only could they not pull it off, but they abandoned the idea as unworkable.

Because People Lie, and Some Believe Them

This has been going on in richer, developed, countries for about a century (and it is a macro issue if there ever was one):

It is happening globally, on net. The focus on burning and clearing in South America, Africa, and southeast Asia is not a bad thing, but it is rarely tempered by this simple fact.

And do note that may people will complain about the quality of the recovering trees and forests. That is not tempered by any evidence that it is worse than what poor people are taking away in the tropics.

FWIW: The area that I grew up in the far outer suburbs of Buffalo, NY, is now almost completely forested. It was farms a century ago. My first apartment was an old farm house, where the farm had been taken over by trees decades before. My second apartment was a new building on a property that had been a farm, and which had returned to woodland. They later cleared much of that, put in a subdivision … and planted a ton more trees.

This infographic is from BeautifulNewsDaily which maintains links to all the source data used. And I don’t think anyone would call it a Republican-oriented site.

Extreme Poverty Diminishing

From BeautifulNewsDaily:

Essentially all of this took place in countries with predominantly capitalist economies. Then again … macroeconomists have been noting that for decades.

BTW: “diminishing”. that is, going towards zero, is a better choice of words than “decreasing”, which is going towards negative infinity.

Fakers? Perhaps Not.

It’s a common thing to view welfare recipients as unmotivated. (Personally, I don’t hold that view, but it’s common enough for me to put it in the title of this post).

That has some overlap with lazy, but it isn’t quite the same thing: you could be one without the other, or both.

However, unmotivated could also be a function of background or environment. So it’s possible that if a welfare recipient is unmotivated to get a job, it’s because they were previously unmotivated to get the skills to be gainfully employed.

Whatever. Can we test for this with data from the real world? Manal Dashpande, a recent Ph.D. student from MIT, now on the faculty at the University of Chicago, has been researching this (here is an older draft of her paper, and here is a summary more accessible to undergraduates).

To do work like this, you look for a “natural experiment”. In short, this means that somehow the circumstances of the people you’re interested were changed, and they had to respond to this change, but they weren’t capable of influencing how or when their circumstances were changed.

Deshpande looked at the change in welfare in 1996. There was a “bright line” cutoff that made the natural experiment possible: children were treated differently based on whether or not they turned 18 before or after August 22, 1996. For a particular form of welfare (SSI), prior to that cutoff, if you got it (as an adult) before the cutoff you automatically got it afterwards. After that cutoff, if you got that form of welfare as a child, you had to be reevaluated when you turned 18. About 40% of childhood recipients were denied as adults. The motivation for that was that some conditions, say mild mental retardation, may incur extra expenses in childhood, but don’t affect a person’s ability to get and hold a job.

One comparison Deshpande made was the income performance of people whose benefits were removed at 18 versus three other groups. One was those who stayed on SSI after age 18 (they were not denied benefits at 18). A second were those who applied for the first time as adults but who were denied (you might call those “fakers”). The third were children whose families had received AFDC (that program was replaced by TANF, which we still have), a program targeted at low income families rather than disabled children (you might call these “poor yet able”). Here’s a chart of their income performance:

The “poor yet able” are the red points: their income rose through time. The “fakers” are the maroonish-purplish points: their incomes also rose. In both cases the rise was up to an average of about $15,000 per year in income. That’s not a lot, but since it’s an average, it indicates that some portion of them were able to do better than minimum wage employment.

The people who were retained on SSI are the dark blue dots at the bottom. Their incomes outside of welfare stayed close to zero, but were supplemented by those continued welfare payments.

The light blue dots indicate that welfare reform may have been to aggressive. Children who were denied benefits when they turned 18, on average, had income that never approached those of more advantaged youth. Deshpande estimated the present value of their income loss at $76,000 over the ages of 18 to 34.

Basically, welfare reform was a big tax on some low income people: being raised on welfare is a condition that hurts your future income prospects. That’s not an argument for getting rid of welfare, but it probably does mean we need to do a lot more to condition recipients to use it as a leg up on their future.

Via Marginal Revolution.

FOH for FMOOWMP (Office Hours)

Students have big trouble with this … especially early in their college careers.

Hat tip to these two pieces from NPR on how to overcome your fear of office hours, and how office hours are particularly foreign to students from rural areas.

FOH for FMOOWMP (Office Hours)

Students have big trouble with this … especially early in their college careers.

Test Post

For some reason a post will not load up here. You can see it by clicking through to my personal blog: it’s entitled “An Interactive Chart of Real GDP Per Capita Improvements”.

A New Progressive Counterpoint About Median Income Over the Last Two Generations

I’m not going to offer any cites for this; it’s a commonplace for Democratic-oriented people to say that incomes have stagnated over the last two generations (say,back to somewhere in the 1973-1982 range). This is usually based on data from the Census Bureau, whose data is more favorable to that position.

This is countered by many economists, whose professional position gives more support to the  Republican-oriented parts of the public. The economists argue that the finding that incomes have stagnated is an artifact of using price indices that systematically overstate inflation, thus making real values lower than they should be. Former Senator and Texas A&M macroeconomist Phil Gramm had a piece with John F. Early (a former assistant commissioner of the Bureau of Labor Statistics — whose overstated inflation measures are at the core of this problem) in The Wall Street Journal just the other day, making this point (entitled “Americans Are Richer Than We Think”).

Mark Thoma (a macroeconomist at the University of Oregon), via Marginal Revolution, pointed me to the blog of Richard Green (a macroeconomist at USC). And he makes an interesting new point that tends to support the progressive side of this debate. Due note that he uses the Census Bureau data, so someone should apply the Gramm and Early critique to it at some point.

Phew … that’s a lot of background in a small space. Anyway, he asserts that the problem is a bit worse because we have a greater share of the population in the bins whose income has stagnated the most. He provides the following table:

	Share in Age Category		Median Earnings (2017 $)
	1980	2017	1980	2017
15-24	0.216	0.120	$13,057	$13,734
25-34	0.232	0.183	$44,252	$40,575
35-44	0.161	0.167	$56,911	$52,403
45-54	0.136	0.169	$56,732	$53,985
55-64	0.127	0.165	$45,200	$48,863
65+	0.127	0.196	$20,845	$32,654

Here’s what’s going on. The first row, people probably your age, have improved a bit from 1980 to 2017. That’s the two columns on the right. But there’s a lot less of them. That’s the second and third columns from the left.

The big problem is that there are 3 rows of people in their prime earning years, 35-54, who are both doing worse, and who are around in greater numbers.  These are somewhat offset by the two oldest rows (which correspond to baby boomers and older).

Personally, I hate most of the other names for generations (there’s a demographic reason to have labeled baby boomers with certain dates, but I feel the others are just random marketing choices). Anyway, other people do use them, and according to Green, it is Generation X and Millenials who are hurting, and that does correspond to general perceptions out in the public.

Some Background On the “Genealogy” of Obamacare, Romneycare, Bill Clinton’s Proposed Reforms, and Republican Ideas

Alan Blinder:†

… Before the ACA, the U.S. stood out from the international pack on health care in two very unpleasant ways. First, it spent a far larger share of gross domestic product on health care. Second, it was the only advanced industrial nation that left vast swaths of its population uninsured. These two doleful facts remain true …

There are several ways to get more people covered. One is to adopt a system in which the government provides or pays for universal coverage—the British or Canadian model. This won’t happen soon in the U.S., not even as Medicare for All.

A second route, advocated unsuccessfully by President Clinton in 1993, is to mandate that every employer provide health insurance to its workers. This approach might seem natural in the U.S. context because so many workers already receive health insurance that way. But the employer mandate has fatal flaws. It wouldn’t cover the nonworking population, and it would impose heavy burdens on small businesses.

For these and other reasons, many economists in the Clinton administration—including me—favored an individual mandate. But that idea was dead in the water in 1993 because it had been advocated by the Heritage Foundation starting in 1989. It was therefore a “right wing” idea.

There are problems with an individual mandate, too. For one, the high cost of U.S. health insurance means that many low- and moderate-income families cannot afford to buy policies on their own. For another, if for-profit insurance companies are made to lose money by covering people with pre-existing conditions, the government must also force young healthy people, who tend to have limited medical expenses, into the insurance pool.

Fortunately, both problems are easily solved—conceptually, that is, not politically—by mandating that everyone buy a policy and providing subsidies to the needy. Massachusetts legislators understood this in 2006. They also knew they were not writing on a blank slate; many citizens received health insurance through their jobs and didn’t want to lose it. Hence the hybrid system that became known as RomneyCare.

If this short description reminds you of the ACA, it should. The two plans are not identical twins, but there is a family resemblance. In 2010 Democrats didn’t follow in the footsteps of Romney Republicans to make them look good; they designed their plan that way because under the constraints of precedent, the underlying logic practically forces you there.

Keep that in mind: If there ever is a TrumpCare, an unlikely proposition, it’s bound to resemble RomneyCare and ObamaCare—no matter what the president claims.

Parse that again: yes, the individual mandate that Obamacare included, and which drew from Romenycare in Massachusetts, that was struck down in 2018 (to the cheers of Republicans), was originally a Republican idea which the Clinton administration rejected (The Heritage Foundation is a conservative think tank).

Read the whole thing, entitled “The Individual Mandate Is Here to Stay”, in the April 14, 2019 issue of The Wall Street Journal.

† Alan Blinder is a pretty big name in macroeconomics, and one you should familiarize yourself with. He’s been a professor at Princeton for a long time, served in the Clinton White House, was vice chair of the Federal Reserve Board of Governors, and is co-author of one of the major principles texts. While he’s published a ton, my sense is that he’s never had the one hugely cited article that puts you on any list for a Nobel Prize.

Barro On GDP and Welfare

Barro [2019] observes that GDP is not a good measure of welfare. Yes, we already knew that, but we use it anyway because it so comprehensive.

But that comprehensiveness gets us into trouble because GDP is a better measure of effort than consumption/welfare.

In particular, he points out that we double-count investment. It’s counted initially when it’s purchased and added to the existing stock of capital. But it’s counted a second time when we include the income from what the existing capital stock produces.

It’s a good thing to count his somewhere, but it’s probably not a good thing to count it in something you’re going to use to assess welfare.

The upshot is that countries that invest more have higher GDP without necessarily making their people better off. That’s not an argument to not invest, but rather an argument that ranking outcomes by GDP will make countries that gyp their citizens look better off than they are.

Here’s a low level discussion of the results, asserting that over half of the capital share of GDP (that thing progressives are so worried about going up) should not be included in GDP at all.

FWIW: this paper shows one of the top macroeconomists of the last 50 years using a model not much beyond what we do in ECON 3020 and the Handbook for the class to make a fundamental point about how we should think about the world. And the method is calculatable with currently existing data.

Why Is Macro So Hard? Marx, Engels, and Plato

The Open Syllabus Project tracks over 100K college syllabuses to see which texts are used.

At number 3 is The Communist Manifesto by Karl Marx and Friedrich Engels (this is the shorter, more political than economic book, that is often paired with readings from the 3 volumes of Marx’ Capital).

WTF.

My guess is that this may be the primary exposure to economics that many students get.

An analogy would be if Paley was read by far more students than Darwin.

This is not to say that Marx wasn’t a great economist. He definitely recognized and discussed the big unsolved or unaddressed problems of his day. But that was half to 2/3 of the way back to Adam Smith. A lot has happened since then. That’s like contemporary chemists reading Priestley: old, seminal on some points, and woefully wrong and out of date on others.

And Marx’ labor theory of value, his core idea, was a failed attempt at explaining the paradox of value. An important aspect of why it failed is that he came up with an answer before others did, that was later shown to be flawed by the marginal revolution. In most fields, that would be called a valiant attempt, with emphasis on the attempt part.

And yet, I have never, ever, had an incoming student at any level who could explain why it was wrong. This makes me think that while # 3 is being covered a lot, an essential part of the story is being left out.

In context, Marx is best thought of as a low and thick branch on the tree of economics knowledge. It was a worthwhile direction to go as the field explored new directions. But when it didn’t work out, economics as we now understand the field to be, backed out of that branch and went down the others, and flourished.

At number 2 is Plato’s Republic. OK. I’ll give on this one. It’s a great and seminal piece of social thought. But I wonder how many students get through as much of it as they can and come out the backside understanding that it doesn’t have much to do with democracy, republics, and elections as they’ve come to understand them?

In an event, as an economist, I find this work to be blissfully unaware that decentralized exchange is important or worthwhile. And yet understanding of decentralized exchange is what economics is all about.

A case in point is the prisoners’ dilemma. It wasn’t until halfway through the 20th century that a couple of mathematicians hit on a fundamental problem for understanding economics: optimal choices do not always lead to optimal outcomes. Plato knew nothing of this when he considered the best government to be that of an all-wise and all-knowing philosopher king, who made nothing but optimal choices.

So why is macro so hard? Because these authors are blithering idiots on the subject of what we now call economics, or on the subject of economics as presented in the news every day. If this is informing students’ viewpoints on some topics, no wonder they find what we do difficult.

I’ll even update my analogy. Paley was at least talking about some of the same things as Darwin. Better yet would be Origen and Augustine, discussing diversity without any conception of the random part of random selection producing it. That’s what teaching Marx, Engels, and Plato is doing to college students.

Proposed Social Security Reform

It’s an opinion, but I feel that for 20 years or so, students have been fairly well-informed that Social Security is not sustainable in its current form. (Unfortunately, like the general public, they do not seem aware that Medicare, because it is both trending upwards and currently has no boundaries is the bigger long-term problem).

Having said that, most seem to lean towards the idea that social security will simply not be around, or won’t be a major contributor, to their retirements around mid-century.

In class, I’ve generally voiced the opinion that I thought it would be around, in much like its current form, and that it would be contributions from younger working people that would change. The big problem here is that older people vote with more frequency, and the politics is you don’t hurt the people who vote more.

*************************************************

Reform proposals come and go, and the new one on the table is from the Democrats (here are some recent proposals from Republicans).

So, this is not a very specific criticism of Democrats or the proposal, but it will point out some of the design features adopted in this proposal that have been touched on in my macro classes over the years.

*************************************************

What’s in the new proposal?

Increased taxes on working people. I hate to say I told you so, but …

Increased benefits for seniors. This is probably necessary to secure their support. It belies the fact that the wealthiest population segment in America is already seniors. On the bright side, it does increase social security payments to the poor by more than to the rich.

A particular bugbear of Democrats is the willingness to create additional tax brackets. The problem is the resulting complexity of the outcoming tax planning. This one is worse because it creates two tax bracket changes, one for the rich and one for the very rich, neither of which is indexed to inflation, making them more complex with the passage of time. This has been dubbed the “doughnut hole”. Do note that on top of this, the change in benefits from the previous paragraph is like creating an implicit third new tax bracket.

On a good note, the proposal does reduce the number of brackets that recipients in middle incomes face.

Probably most importantly, the reform would change the adjustment for inflation. We’ve known for about 25 years that using the CPI to adjust for inflation creates long-term problems because it overstates inflation rates. The new reform would make this worse by switching to a new measure of inflation known as CPI-E. This new measure actually results in higher inflation rates than the old one. So this is a sneaky way to amplify an old problem. This is pure politics again: if you choose a more accurate measure of inflation to use, because we’re too high that must be lower, benefits for seniors will grow at a slower rate. Lobbyists for seniors (like the powerful AARP) are the one who keep that sort of thing from going through, and they’ll love using the new index.

*************************************************

Keep your eye on the ball here.

Social Security needs reform.

Reform will happen eventually. Both parties want to be the ones who get credit for it.

Each party proposes a set of compromises, looking for the set that will ultimately pass.

Those compromises will always have bad stuff in them, to get some good stuff too. This just happens to be the Democrats current bad stuff, and my honest opinion is, that increasing tax complexity and a preference for biased inflation adjustment are fairly normal for how they operate.

Why Is Macro So Hard? Don’t Measure What You Don’t Want Others to Find Out

Here is an example from Berkeley passing a sin tax on sugary sodas. The goal of these is allegedly to combat obesity. If so:

The problem with the way the soda tax is implemented, however, is that the city treats the policy as a settled issue rather than an experiment. It does not account for the possibility that the policy may fail. In fact the city’s decision-makers do not even bother to outline what they would consider a success for the soda tax in terms of reduced obesity. They have not announced any plans to track the tax’s impact on obesity rates. Thus, even if the policy fails to reduce obesity, the tax will likely continue.

Maybe the purpose of the tax isn’t really to combat obesity at all. Maybe it’s just to raise money. Cold Spring Shops (linking to this article, with more here and here) quotes that those two probably don’t go together

As with all sin taxes, there's a contradiction at the heart of California's proposed soda tax: the policy is supposed to both dissuade soda purchases and raise significant revenue from taxing them. To succeed on one metric is to fail on the other.

The reasoning is nothing if not obvious:

• If the tax is going to reduce obesity by discouraging people from buying sugary drinks, then their demand must be elastic. So little tax revenue will be collected.
• If the tax is going to raise revenue, it must do so because people will buy the sugary drinks in spite of the tax, because their demand is inelastic. So obesity won’t change much.

Ya’ can’t be elastic and inelastic at the same time.

Thing is, if they knew this, it would make sense to discourage collection of data.

It all makes sense now …

Some History of Government Backed Mortgage Lending

Any decent explanation of the financial crisis of 2006-9 needs to include the implicit backing of mortgages with taxpayer dollars. In the U.S., most mortgages are backed by GSE’s. Backing means that if those real estate purchases went well, the mortgagee/buyer keeps the gains, but if they do badly and the mortgagee/buyer walks away or declares bankruptcy, the holder of the mortgage covers the loss.

Note that I do not say mortgager. Most mortgages are offered/written and/or contracted by local financial institutions. The money to make those loans often comes from GSE’s. And the mortgages, once written, are often bought by GSE’s; they then receive the payments as their income to finance their operations, including making new loans.

And what’s a GSE? That’s short for Government Sponsored Enterprise. Basically, there is no private entity doing some thing (usually because it is a dumb idea that won’t make money). So the government creates/sponsors one. These then operate sorta’ like private corporations. Except: 1) they’re located in D.C. and report primarily to politicians and bureaucrats, and 2) if they go bankrupt it’s seen as something that must be prevented at all costs, so those politicians pony up tax revenues to keep them running. There are lots of GSE’s in the U.S., and in other countries too.

In the U.S., the big GSE’s involved in housing are the FHA (Federal Housing Administration, this one is actually part of the government), Fannie Mae (Federal National Mortgage Association), Freddie Mac (Federal Home Loan Mortgage Corporation), and Ginnie Mae (Government National Mortgage Association).

******************************************************

N.B.

It is an urban myth that real estate is always good investment. That’s why they needed to create GSE’s: they wanted to jump start a type of investment that markets deemed unwise for most people.

The sense in which contemporary real estate purchases are a “good investment” is that you are allowed to make the purchase mostly with borrowed money, and the protections for the buyer if the investment goes bad are stronger than with other investments.

Basically, it’s heads you win, tails someone else loses … set up with an investment that is mediocre. That creates a moral hazard.

Financially, it also makes home purchases like buying a call option, with the attendant agency problems.

Here’s the thing (or two things). Our mythology of America is that the Great Depression was caused, in part, by people buying stocks with borrowed money. So Congress’ solution to that was to make that hard to do, but make it easy for people to buy houses the same way. Duh! And, most people are told to shy away from buying options, and yet they’re encouraged to buy homes as options without telling them that they now have an option. Double-duh!

******************************************************

D.C. likes to tell us that reforms instituted after 2008 (including Dodd-Frank) cleaned up this mess.

Most economists do not find this credible. While Dodd-Frank did many things, it did not address the fundamental problem: there’s moral hazard involved in borrowing someone else’s money to buy a home. Further, homes are probably the last asset you’d like people to buy with borrowed money: they’re not very liquid, and you can’t shop them around to different locations in the hopes of finding buyers willing to pay more for them.

******************************************************

All of this is a lead up to an informative blog post by Kevin Villani at Chicago Boyz. It turns out that Villani has way more expertise on this than most people. Here’s his bio:

Kevin Villani, chief economist of HUD during the Carter and Reagan Administrations and Freddie Mac from 1982 to 1985, is the author of Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

Here’s the history of these GSE’s, in a nutshell:

U.S. secondary markets evolved entirely in response to anachronistic political forces. FHA was created in 1936 to stimulate new construction jobs [not a bad idea during the Great Depression] subsequent to a huge housing construction boom [it worked]. Fannie Mae was created two years later to prop up flagging demand for FHA mortgages [investors didn’t have money for mortgages before, and they didn’t still when FHA marketed more of them]. Ginnie Mae was created in 1968 to liquidate Fannie Mae after prior privatization attempts failed … Rather than liquidate, the privatized Fannie turned to funding conventional mortgages for their mortgage banker clients. To protect their turf, portfolio lending savings and loans [S&L’s were a different type of bank, also created by legislation during the Great Depression, which have largely ceased to exist, except in name, when many of them crashed in the financial crisis of the late 1980’s] then demanded their own secondary market facility, Freddie Mac. It later privatized mainly to provide management incentives comparable to Fannie, particularly stock options.

They then morphed into massive public directed credit institutions, with profits from government subsidies privatized but otherwise lacking the benefits of market efficiency and discipline. About half of F&F subsidies were captured by shareholders, managers and politicians (my estimates) … [Bracketed comments are from me. Parenthetical comments are the authors].

Many presidential candidates, and much of Congress is interested in further reforms. Villani points out what we’ve learned so far:

• Private markets operate on one set of incentives and accountability, government on an entirely different set. Each has its problems and imperfect solutions.
• Private markets may inappropriately discriminate against qualified borrowers, for example, whereas public programs may fail to adequately discriminate.
• Public enterprises created to jump-start or complement private markets often miss the mark, with unintended consequences.
• Politicians much prefer to deliver subsidies through taxes (in this case tax exempt debt substituting for taxable equity) rather than expenditures – especially since the Budget Control Act of 1974 – and implicit off-budget credit guarantees that delay the reckoning.
• In spite of good intentions and design to get the best of both, privatized hybrid public-private systems inevitably embody the worst: public risk for private profit. Lacking both market and public discipline, they cause systemic failure that “nobody could have seen coming.”
• Political reform reflexively blames private market failure, doubling down on unaccountable and ineffective bureaucratic methods while providing opaque bailouts through greater tax and credit subsidies.
• Political reform starts with what is, not what should be, repeating the cycle.

Read the whole thing. Highly recommended.

Anyway, d’ya think mortgage finance is a big enough issue to be covered in macroeconomics classes? Yep.

And, it’s common for people to make the claim “no one told us this could happen”, but I can attest that the moral hazards of GSE’s in the housing market has been part of my macro classes for 30ish years.

Oh … and … student loans are financed the same way (through, you guessed it, Sallie Mae). Just sayin’ …

Wealth Taxing In the U.S.

Taxing wealth appears to be an issue for the 2020 election cycle. Democrats are pushing ideas for new ones, and we’ll probably see something along those lines if they defeat Trump.

I say “new ones” because, as Tyler Cowen points out, we already have important taxes on wealth. But people don’t seem to want to recognize them as such.

First, we have the capital gains tax, paid on many assets if the sale price exceeds the purchase price. Of course, assets are synonymous with wealth.

Further, the capital gains tax is not indexed to inflation. This means that when the nominal value of your asset goes up faster than your real value, you pay the tax on the nominal increase.

For example, if you bought an asset for 100, and its real value does not change, but there is 20%inflation, you would sell the asset for 120 and pay a tax on the nominal gain of 20 even though you’ve made no real gain. This isn’t a hypothetical: it’s fairly common on vacation homes and stock investments.

FWIW: Indexing capital gains taxes for inflation has been in the policy discussion mix for 40 years now. It doesn’t get passed because it is seen as a tax break for the rich, and as a likely reducer of tax revenue. It is very hard to get across that “break” might be the wrong word if you’re going from something unreasonable to something reasonable.

Capital gains tax revenue is not huge (it is part of federal individual income taxes, and varies from 6 to 12% of those, so between $100-200 B/yr).

But second, property taxes, mostly paid to state and local authorities run close to $700 B/yr. These are mostly paid on real estate. Interestingly, home owners pay the tax on the entire assessed (gross) value of the property, rather than the (net) equity which is their wealth.

Lastly, most people recognize taxes on inheritance as a tax on wealth, but in point of fact, these don’t actually collect that much revenue (about $20 B/yr). The primary reason for this is that low levels of inherited wealth are untaxed, and while high levels of wealth are taxed … there aren’t as many very rich people as most of think.

I think the Democrats should be held to some numbers here: if tax revenue across all jurisdictions is about $7,000 B, and wealth taxes are already 10-15% of that, should they be presenting their proposals as new ideas at all?

The Biggest Story In Economic History Continues

You should be hearing about macroeconomic news like this. All. The. Time.

It’s a testament to the low key awfulness of the legacy media and politicians that you don’t.

Anyway, the UN reported that India lifted 271 million people out of poverty between 2006 and 2016.

That’s almost as large as the population of the whole U.S.

And, India wasn’t the only country doing this.

The report said that in the 101 countries studied — 31 low income, 68 middle income and 2 high income - 1.3 billion people are “multidimensionally poor”, which means that poverty is defined not simply by income, but by a number of indicators, including poor health, poor quality of work and the threat of violence.

The report identifies 10 countries, with a combined population of around 2 billion people, to illustrate the level of poverty reduction, and all of them have shown statistically significant progress towards achieving Sustainable Development Goal 1, namely ending poverty “in all its forms, everywhere”.

The 10 countries are Bangladesh, Cambodia, Democratic Republic of Congo, Ethiopia, Haiti, India, Nigeria, Pakistan, Peru and Vietnam.

Due to its size, India was the biggest improver, but the rates of improvement are startling:

India reduced deprivation in nutrition from 44.3% in 2005-06 to 21.2% in 2015-16, child mortality dropped from 4.5% to 2.2%, people deprived of cooking fuel reduced from 52.9% to 26.2%, deprivation in sanitation from 50.4% to 24.6%, those deprived of drinking water reduced from 16.6% to 6.2 %.

Further more people gained access to electricity as deprivation was reduced from 29.1% to 8.6%, housing from 44.9% to 23.6% and assets deprivation from 37.6% to 9.5%.

I also should not have to teach these sorts of factoids to college-level students, but given the priorities of others I have to:

• All humans used to be desperately poor.
• The only sustained period of improvement in that condition is the current one (ongoing for about 350 years, or 7% of human history).
• This enrichment is associated with regions that practice market tested betterment.
• The improvement in China and India over the last 40 years are unprecedented improvements in the condition of humanity
• Those changes are associated with a shift in political, social, and legal culture away from other systems and towards one market tested betterment.

Central Banking by Lawyers

Ummm … this can’t be right (but it is):

With Lagarde at the ECB and Powell at the Fed, lawyers, not economists, will be running the world's two most important central banks.

I hope it ends well.

Mercator Adjustment

Two visualizations of correct sizes on a Mercator projection:

I have started using some maps in this class and its Handbook, so a visualization like this is a good thing to refer to once in a while.

From Visualcapitalist via bookofjoe.

Venezuela

Americans get a lot of misinformation about Venezuela. Here’s Tyler Cowen, author of prominent principles textbook, mega-blogger, in Bloomberg:

Republicans are labeling the country “socialist,” using Venezuelan problems as a weapon against more left-leaning Democrats. Commentators on the left, in contrast, are arguing that Venezuela is more of a failed petro-state with bad leadership, rather than a test of socialist ideals. Who is right?

If we look at government spending as a percentage of GDP, Venezuela seems far from socialism. In recent years government spending in Venezuela has been measured at about 40 percent of GDP …For the U.S., the corresponding figure is about 37 percent.

Yet emerging economies typically cannot afford the same government programs as wealthier countries, and they cannot run them with the same efficacy. …

Furthermore, rates of change are important. The Venezuelan figure of about 40 percent is up from about 28 percent in 2000, a very rapid increase. …

Or consider exports, which for most developing economies play an especially critical role. They bring in foreign exchange, provide contacts to foreign markets, and force parts of the economy to learn how to compete with the very best foreign companies. Yet over 90 percent of Venezuela’s exports are oil, and those resources are owned and controlled by the government.

People on the political left need to tread carefully here. Venezuela is a place the left used to be proud of:

Greg Grandin, writing in The Nation in 2013, offered a laudatory take on Chavez and suggested that Venezuela “might be the most democratic country in the Western hemisphere.” (He also argued, oddly enough, that Chavez “wasn’t authoritarian enough.”) Jeremy Corbyn, leader of the U.K.’s Labour Party, has also been a big Chavez fan, while Nobel laureate economist Joseph Stiglitz praised Venezuela’s economic policies in 2007 and declared that the risks of higher inflation were overrated.

Keep in mind that for all its faults, Venezuela used to be the richest country in Latin America. The political left has a lot of macroeconomic explaining to do on this one.

Interesting Healthcare Tidbit

The “expensive” healthcare in the U.S. has big box pharmacies with lower prices.

The “cheaper” healthcare in Europe has small, local, pharmacies, with higher prices. Oh, and it has rent-seekers out to defend the status quo.

I wonder whether or not this is included in most peoples’ assessment of the cost and value of healthcare.

FWIW: Backpacking around Europe in 1984, I found out that in Switzerland the only place you could buy shampoo was the local pharmacy. I still remember paying over $6 for a small bottle. That’s about $15 in 2019.

Oh … That Sneaky Republican Tax Reform

Last year I posted an 11 part series on the tax reform passed by the Republicans. I thought I had covered all the important parts. Not so.

“Democratic socialists”, led by Alexandria Ocasio-Cortez want to raise the marginal tax rate on high incomes to 70%. I’m not sure they have an economic motivation for this, it may simply be resentment.

Surprise, surprise … the Republicans already did this.

Actually, they did worse: the Republicans did raise the effective tax rate, Democrats are merely proposing to increase the marginal rate.

Here’s what the Republicans did: they instituted a new form double taxation of corporate officer incomes.

N.B. Double taxation means the same thing is taxed once, and then taxed again. It occurs all over (and some have argued that incomes in the U.S. are taxed up to 5 times).

After the tax reform, income paid to executives must be taken out of the corporate income statement below taxes (with after-tax profits) rather than above them (with costs). And then they’re taxed again at the personal income tax rate.

To be concrete, paying a corporate officer of a publicly traded New York company an extra $1 million will result in an additional $261,350 in federal and state corporate taxes, $370,000 in federal individual income tax, $38,000 in payroll tax, and $127,000 in New York State and New York City tax.

Since the $261,350 part would come out first, the corporation would actually be paying $1,261,350 and then subtracting the $261,350, on which an additional $535,000 in taxes would be paid. That works out to an effective marginal rate of 63% (i.e., 796,350/1,261,350).

Read the whole thing. This is from the Brookings Institution, which is not known for being sympathetic to Republicans (and which probably qualifies as part of Trump’s “swamp"). It’s entitled “Ocasio-Cortez wants to raise the tax rate on high earners. The Tax Cuts and Jobs Act already did”.

*****************************************************

Of course, AOC isn’t proposing this. She wants something even worse: to raise the marginal federal personal income tax rate on incomes this high from 37% to 70%. In the above calculation, that would mean an 89% effective marginal rate for the corporate officer..

It’s cynical, but all of this makes me think that “Democratic socialists” just say things they think will play well in the legacy media, without actually thinking about them very deeply. And then people repeat them loudly.This can be difficult to parse out: if 70% is proposed, but they’re already paying 63%, is 89% what you really want, and if not, what is??

Socialism vs. Democratic Socialism

“Democratic socialism” is the new thing: a name for what the progressive side of the Democratic party has wanted to do for quite some time.

It isn’t socialism. For that, we need to go to Venezuela. Both Democrats and Republicans (and especially young people should know better than to say it is). Here’s Greg Ip:

… The very word “socialism” has been debased into a millennial hashtag on the left and a schoolyard taunt on the right …

Some polls find young American adults prefer socialism to capitalism …

Would these people actually know socialism if they saw it? Taxing the rich, Medicare-for-all, and a Green New Deal that replaces fossil fuels with renewables are certainly liberal, probably radical, possibly unwise.

But socialist? Hardly.

They redistribute the outcomes of the market; they don’t replace the market with the state as the means of allocating production. That’s the hallmark of true socialism, and Venezuela’s catastrophic experience is a useful lesson in why it is has fallen out of favor around the world.

Here’s what real socialism did in Venezuela, according to Ricardo Hausmann:

… Expropriated six million hectares of land, the steel sector, cement sector, supermarkets, telecoms, banks, dairy factories, coffee processing factories, hotels, and essentially ran all of them into the ground …

Back to Greg Ip:

Venezuela’s socialism, which was heavily influenced by Cuban communism, isn’t just a disaster; it’s unique. Despite the region’s long history of left-wing populism, no Latin American country has since followed Venezuela’s path.

The point of all this is that we may as well drop socialism from the “Democratic socialism”. But that just leaves. But that points up the essential problem: maybe “Democratic” wasn’t selling that well to voters, so they’re trying to dress it up differently.

Read the whole thing, entitled "Venezuela’s Collapse Exposes the Fake Socialism Debated in U.S." in teh February 6, 2019 issue of The Wall Street Journal.

Why Is Macro So Hard? Bias Against Emergence and Bias Against Understanding

Macro is hard because journalists (and many of the rest of us) overweight conscious action by individuals — decisions.

If we overweight something, we must underweight something else — and that’s emergence: the idea that some things happen through the interaction of all of us rather than through conscious planning.

Cold Spring Shops pointed me towards a couple of pieces and Stumbling and Mumbling that cover this well, in the context of Brexit and the rise of Boris Johnson. Not all of this is relevant here; I’ve emphasized the parts I like best.

I fear that we have here is another example of a bias against emergence. Political journalists especially focus upon conscious political actions to the neglect of emergent processes.  Brexit is a political choice whereas other, perhaps bigger, influences on real wages are the complex unintended products of millions of dispersed decisions. So Humphrys pays the former more attention.

…

Nor is it confined to journos. Leftists sometimes blame rising CEO pay on bosses’ greed, as if the rest of us would turn down pay rises, and under-estimate the extent to which it is the result of partly-emergent processes such as globalization (pdf), deunionization, agency failure or managerialist ideology.

In this respect, the BBC has what John Birt and Steve Richards called a “bias against understanding.” In downgrading the importance of emergence, it stops viewers and listeners from understanding social phenomena.

But this all leads to a disturbing conclusion:

If this bias merely led to ignorance, it wouldn’t be so bad. But it might have a more systematic effect. If we underweight emergence, we overweight the role of conscious individual agency. This causes us to exaggerate what politicians and business leaders can achieve if only they display strong leadership. And that, in turn, helps to sustain inequalities of income and power.

It gets better in the second piece:

The thing about complex emergent processes is that they are hard to understand – there’s a complexity brake – and even harder to forecast. This might explain why economists have generally failed to predict recessions in a timely manner.

This is why I say the BBC is guilty of an ideological bias. In not even considering the question of emergence, and instead pretending that markets are like people, it is assuming that complex social phenomena – not just markets but perhaps political behaviour too - are understandable and predictable.

This is no mere innocent error. If markets are like toddlers or teenagers, it’s possible to understand and predict their behaviour and so Very Serious People can claim to possess expertise and hence a legitimate right to power and influence in politics and business. If, however, they are instead complex processes they might not be predictable – except in the sense that we might know the probability distribution of possible outcomes – then those VSPs are in fact mere empty suits.

As Alasdair MacIntyre wrote:

Do we now possess that set of law-like generalizations governing social behaviour of the possession of which Diderot and Condorcet dreamed? Are our bureaucratic rulers thereby justified or not? It has been insufficiently remarked that how we ought to answer the question of the moral and political legitimacy of the characteristically dominant institutions of modernity turn on how we decide an issue in the philosophy of the social sciences. (After Virtue, p 87)

In unthinkingly denying the very possibility of complexity, the BBC is therefore helping to shore up the power and prestige of the ruling class. That’s a profoundly politically biased position.

I love that. And turning it on its head, it’s critical for the ruling class to assert that things can’t be emergent/complex.

My gosh … Trump may have had a huge insight when he remarked that healthcare policy was hard!

Cross-posted from my personal blog; this topic isn’t a great fit for undergraduates just getting exposed to these ideas.

Took Some Time Off

For Spring 2019, a computer lab came completely free for use in ECON 3020 after spring break. Because of this, we did more extensive work on time series and growth theory, and spent less time on policy and current events in this blog.

So, I’ve got a backlog of things to post here.

A 5th Test

I’m getting weirdness with my blogging software. This is a test to see if it carries over to the Blogger platform too.

(Strongly Political Post for Today. Use for Tinfoil Hat As Needed.): The Financial Crisis and Bailouts

The Wall Street Journal has an op-ed page that is generally regarded as conservative, Republican-oriented, and pro-business (it would be more correct to say that it is pro-markets). Within that, their column leaning most in that direction is James Freeman’s Best of the Web.

So, fair warning, this post isn’t about a neutral topic.

Having said that, I found that the March 21 piece entitled “Bank Bailouts and the Washington Post” (a copy is saved to the G drive too) had a lot of solid macroeconomics in there. It touches on some ideas we talked about earlier in the semester regarding recessions, financial crises, and housing markets … and it does so in a way that’s consistent with mainstream macroeconomic thought.

Primarily it’s about Bernie Sanders, and the paper’s Fact Checker column evaluating this statement that Sanders has used on the campaign trail:

Not one major Wall Street executive went to jail for destroying our economy in 2008 as a result of their greed, recklessness and illegal behavior. No. They didn’t go to jail. They got a trillion-dollar bailout.

Fact Checker was concerned about two points: the trillion dollar figure, and the no one went to jail claim. They ultimately gave the overall quote “2 Pinocchios”.

First, let’s tee-up the no one went to jail claim. Freeman points out that:

Neither the Post nor Mr. Sanders seems much interested in exploring the most obvious possibility—that many actions were financially ruinous but not criminal.

This is not a politically popular point but it’s true.

Such an inquiry would lead to unpleasant findings about the myriad ways in which Washington encouraged bankers and everyone else to invest in U.S. residential real estate—from creating the mortgage monsters Fannie Mae and Freddie Mac to promoting lax underwriting with “affordable housing goals” to negative real interest rates set by the Federal Reserve in the early 2000s to bank capital standards in concert with government-anointed credit ratings agencies which encouraged the purchase of mortgage-backed securities.

It’s a sad point, but if the government encourages you to do stupid stuff, and you do and get ruined, it’s not actually criminal.

Don’t believe me? Why does the government subsidize flood insurance for people who build homes in floodplains, and then offer low interest loans for people to rebuild in the same spots??

On the second point, Fact Checker splits hairs about the size of the bailout. Let me ask you: if you’re busted, and need a loan, but wouldn’t get one out in the real world under normal circumstances, but then you do and are able to pay it off … is it a bailout?

I’ve phrased the question that way because it’s similar to the sort of situations college students get themselves into when they have to ask their parents for extra money.

Here’s the thing: you probably shouldn’t wait until after the loan is repaid to judge whether or not it’s a bailout. This is because it’s a lot easier to say it’s not a bailout if the borrower recovered because the whole possibility that they might have is being ignored:

… The Post’s “Fact Checker” makes the tendentious argument that Federal Reserve loans to banks during the crisis shouldn’t count as bailouts.

…

Not only was Wall Street bailed out, but also the whole U.S. economy — at a profit of more than $200 billion for U.S. taxpayers.

I am of the opinion that there was a bailout, and it was the right thing to do. Part of that was a liquidity crisis, and part of it was a solvency crisis. And one of the big lessons of the poor monetary response to the Great Depression was that liquidity crises can and should be addressed strongly because they can be defused. Unfortunately, it’s a problem that you can’t tell whether a particular financial crisis is, say 80% liquidity crisis and 20% solvency crisis (and therefore both easy and important to address strongly), or 20-80 liquidity (and more problematic).

In short, if one of the roles of your central bank is to be the lender of last resort, then you should let it lend in the last resort, and quit second guessing.

Freeman writes the way I speak in class sometimes:

It’s a conventional opinion but not a fact that the U.S. economy would have been worse off without bank bailouts.

Good macroeconomists get that figuring these things out is really hard after the fact.

Per Capita Healthcare Costs

I think a lot of people simply don’t understand where all the money goes in healthcare. New research† fleshes out the lifetime costs (in 2000 dollar real terms, but not in present value).

The estimates are $361K for women, and $269K for men. About 40% of that difference can be attributed to women’s greater longevity, while the other 60% is presumably pregnancy related.

We tend to blame a lot of those costs on prescription drugs. Not so: about 15% of lifetime healthcare expenses are for drugs.

Where’s the rest of the money go?

Roughly 45% goes to staying in facilities: hospitals, nursing homes, rehabilitation centers, and long-term care institutions.

About 30% goes to acute care in hospitals (that does not include the costs of staying there, and being provided with routine/chronic care).

Roughly 25% goes to service professionals, like doctors and nurses.

***************************************************

There’s a really good takeaway here. Think about how much it costs to stay in a hotel or vacation rental.

Here’s my personal experience. I stay in a nice hotel with a big discount when I go to Salt Lake City (I stay at the University Guest House at the parents’ rate). The cost of a decent hotel room (in which we have slept three) is about $120/night. My mortgage is about $60/day. From that, I conclude that a hotel, for most people, is roughly twice as expensive as a home. That’s just a ballpark figure, but my guess is that it’s fair to say that, for most people, staying away from home costs twice as much or thereabouts.

Here’s the thing: nursing homes, rehab centers, hospitals, and institutions are basically hotels with extra expensive services. This is where most of America’s healthcare dollars are going.

On the other hand, if you’ve ever cared for someone at home … you’ve probably at least contemplated that those care facilities are a pretty good deal.

P.S. Just for BB: the lifetime costs of dental care are about $31K.

† The source article is “The Lifetime Distribution of Health Care Costs,” by Alamayehu and Warner, in Health Services Research.

Infrastructure: Why Does America Pay So Much for Stuff That’s So Lousy?

Politicians love to talk about infrastructure spending. Trump wants a trillion dollars for it! Now that’s macroeconomic!!

Yet, most people don’t know exactly what it is. Here’s the big 6 components: the electricity grid, pipelines, railroads, airports, port facilities, and bridges. Roads and particularly highways kinda’ sorta’ belong on that list too, but most of them are done locally, and if you think about it … mostly go between places connected to the grid, pipelines, railroads, airports, and ports.

Our international students can confirm that a lot of America’s infrastructure is … hmmm … not what they expected from a country they viewed as big and rich. Why is that?

In short, what we build stinks because it costs more than it should.

Here’s one opinion why:

Americans have to understand that they are behind … They have to let go of the mythology of the American entrepreneur who does not listen to the experts. They can solve the problem of high construction costs if they want, but they need to first recognize that it exists, and that internal politics and business culture are part of the problem rather than the solution.

Oops. Didn’t we just elect an exemplar of “the mythology of the American entrepreneur who does not listen to the experts”?

I drew that from the conclusions of a long post at the blog Pedestrian Observations. There, 9 problems with building infrastructure in the U.S. were outlined (with an emphasis on examples from subway projects, and light rail like the Trax system in Salt Lake City).

• Almost all countries bore tunnels for subways (more expensive), but they dig out a big hole to make the station (cheaper). In the U.S., we bore out the station too, so as not to disturb the surface as much.
• Mezzanines: you know those shopping malls around public transport that … no one goes to for the shopping (think about it, you buy stuff there because you need to, not because the prices are good). Most countries don’t have those. Where exactly did our governments get the idea that they need to build malls, but only in subways, airports, and train and bus stations? A few shops are fine … but private malls on the surface have been going extinct for a couple of decades.
• Low bid contracts: in the U.S. we mostly require governments to go with the lowest bidder, but we don’t check how much extra it costs when we that bid needs to be upgraded. In many cases, the strategy is to offer the lowest bid, and jack up the prices when things need to be spruced up. (You may be sitting in one of those projects right now).
• Incomplete contracts and lawyers: in the U.S., those upgrades get negotiated on a case by case basis, instead of having stipulated prices in advance which bureaucrats could choose from.
• Poor management: transportation agencies are put in charge of managing their own construction projects, rather than having a government “department of construction” that might develop expertise.†
• Turf battles: this is a disadvantage of America’s decentralized and Federalized system of government.
• Irrelevant additions: everyone likes their public transportation to look nice, but the U.S. is known for overdoing it, especially on refurbishments of older facilities.
• Politicians are not hurt by high costs: who exactly is hurt by California shutting down construction of its high speed rail line? Note that California spent zero of its own money on that project so far … it was all federal money, coming from Cedar City amongst other places.
• Global Incuriousity: I love this one so much, I’m quoting below.

Functional illiteracy is a great concept. About 20 years ago I started incorporating innumeracy — the inability to process or make decisions about large numbers — into my explanations mix. And now I get to add incuriousity: the unwillingness to be curious about how other people do things because they might be doing it better.

That is America in a nutshell: we are conditioned to be incurious.

Incuriosity is not merely ignorance. Ignorance is a universal trait, people just differ in what they are ignorant about. But Americans are unique in not caring to learn from other countries even when those countries do things better. American liberals spent the second Bush administration talking about how health care worked better in most other developed countries, but displayed no interest in how they could implement universal health care so that the US could have what everyone else had, even when some of these countries, namely France and Israel, had only enacted reforms recently and had a population of mostly privately-insured workers. In contrast, they reinvented the wheel domestically, coming up with the basic details of Obamacare relying on the work on domestic thinktanks alone.

…

Americans venerate founders and innovators, an approach that works in industries where the US is in the global frontier, like tech or retail, but not in ones where it lags, like cars and the entire public sector. To avoid learning from others, Americans end up believing in myths about what is and isn’t possible: they insist they are so much richer than Europe that they have nothing to learn from across the Pond, and hang all their hopes on any flim-flam artist who comes from within American business culture …

Oops. Does that sound like you know who? For that matter, does it sound like flim-flam artists from other cultures, like Obama, who was elected to the presidency with an essentially empty resume? Or Bush II whose claim to fame was being partial owner of a baseball team?

Americans … have to let go of the mythology of the American entrepreneur who does not listen to the experts.

The latter is, of course, a huge problem with understanding macroeconomics. How often are you personally forwarded some meme or video relating to macroeconomics broadly? The thing is … I bet you’re never forwarded memes or videos like that about biochemistry, cinematography, or diachronic linguistics? Think about that for a minute.

Ready for some examples or transportation policymakers not listening?

… Tells me of an official at either Caltrain or the California High-Speed Rail Authority, I forget which, who did not know Germany had commuter trains. Another Caltrain official, confronted with the fact that in Japan trains turn faster than Caltrain thought possible, responded “Asians don’t value life the way we do” – never mind that Japan’s passenger rail safety per passenger-km is about 1.5 orders of magnitude better than the US’s. In stonewalling about its safety regulations, since positively reformed, an FRA official insisted American trucks are heavier than European ones, where in fact the opposite is the case. Boston’s sandbagged North-South Rail Link process included a best practices section but insisted on only including North American examples, since European ones would make America look bad. [BTW: I had no idea we even had an agency known as the FRA, short for Federal Railroad Administration].

Canada is not much better than the US. Americans’ world is flat, with its corners in Boston, Seattle, San Diego, and Miami. Canadians’ world includes the United States and Canada, making it flat with the northern ends of the quadrilateral stretched a few hundred kilometers to the north. A study of a long-overdue extension of Vancouver’s Millennium Line to UBC has four case studies for best practices, all from within North America. This is despite the fact that in the developed world the system most similar to Vancouver’s SkyTrain in technology and age is the Copenhagen Metro …

† The article notes a story I love. In Madrid, they evaluated the costs of their proposed big subway project by comparing it against subway projects around the world. Their list of subways included a surface light rail project in Boston because the Spaniards all assumed that any project so expensive must have involved a lot of digging. It didn’t.