Public Economists You Might Try Reading (Optional)

This is from Alex Tabarrok. The quotes are from an article entitled “How Are Economists Portrayed by the Media? Let’s Ask Them.”

Some journalists (of all political stripes) who write with great economic understanding are

… The quality of the coverage of economics in the media is often excellent and has never been better. Greg Ip, David Leonhardt, Catherine Rampell, Adam Davidson, Stacey Vanek Smith, Cardiff Garcia, Megan McArdle all do superb economic commentary and reporting not just about the economy but about economics. And those are only the people off the top of my head, I could name many more.

Some of these people write regular columns, that appear on the same day(s) every week. Others write occasional columns, that appear irregularly, but still once a week or so.

Ip writes quite a bit for the Wall Street Journal. He writes for two occasional columns called Capital Account and The Outlook. He also writes a lot of the news articles in their Economy section.

David Leonhardt writes a few op-ed pieces a week for The New York Times.

Catherine Rampell writes for The Washington Post, and has a piece appearing every few days. Megan McArdle writes for them as well.

Adam Davidson writes for The New Yorker, mostly about politics, but his understanding of the economics of that politics is very good.

If you like to listen, Stacey Vanek Smith and Cardiff Garcia are on NPR’s Planet Money show. You can also subscribe to her podcast The Indicator.

And then there’s professional economists you might read, like:

The public also has access to top economists through the blogs and social media. I would count Paul Krugman, Tyler Cowen, John Cochrane, and Jeniffer Doleac [sic] in this category.

Krugman’s columns are from The New York Times, where he’s been a regular columnist for over a decade. He’s been a professor at Princeton for about 40 years, and won a Nobel Prize for his work on one aspect of trade (for my money, he could win a second for a different aspect, if they awarded them that way).

I am not yet familiar with Jeniffer Doleac. She’s young/new. I’m on the lookout for her stuff now (she is on Medium and/or Twitter) .

Of course, all of these people also write for other outlets and in other formats.

What Are They Fighting Over? Walls and Border Walls Edition

In this class, we cover current events as they relate to macroeconomic policy. It’s hard to believe, but the current debate over “the wall” is an issue for class this semester, since the government is partially shut down over this, and that has (modest) macroeconomic consequences.

So, what does Trump want, and what is Pelosi refusing to cooperate with? (Keep in mind, that she has constituents she’s trying to satisfy, and controls a very blunt instrument).

• Trump wants $5B for “a wall” on our southern border. To make the math clear, I’m going to rewrite that as $5,000M.
• That is a one-time expense. Yes, there would be other expenses for other sections in the future. And yes there would be a flow of expenses to maintain what is built with the $5,000M.
• Foxnews.com reports that DHS plans to add 215 miles of new and/or improved wall with the money. That works out to about $25M per mile.
• We already have a lot of wall on that border. Check out this fantastic interactive graphics from The New York Times. The border is roughly 2,000 miles long, the western third mostly sits on federal government land (mostly BLM), and almost all of that is completely walled already (some of the money is intended to make those parts harder to pass through).
• Yes, Republicans are kind of correct that Democrats supported building those barriers. However, do note what was funded before was what Trump now regards as inadequate, and that part of the current proposal is to fix that up.
• Newer and better estimates show that the “official” numbers from the Census Bureau to scope the size of our illegal immigrant population appear to be grossly understated (if you’re on the low side by half, I wonder how the Census Bureau has any voice in this debate at all).
• We also employ 16K Border Patrol agents along the southern border. Let’s ballpark that: 16K agents, getting compensated at $100K/yr on average, works out to $1,600M/yr. In most organizations, labor is 2/3 of the cost, so figure $2,500M/yr: so an annual expense flow that quickly swamps what Trump is asking for.
• Ummm … don’t forget that we have (sound barrier) walls all over our interstates. In fact, we have more of those than we do border walls on the southern border (about 4 times as much). These are cheaper though, costing about 10% of what border walls do. Ballparking it out, they would cost about $10,000M to build all at once. But we build them incrementally; for example they spent roughly $500M on them between 2008 and 2010.
• Mexico does not have a border wall on its southern border (with Guatemala): this is an internet hoax. However, the border is very rugged, so most people follow the roads, and Mexico has had longstanding issues with its own illegal immigration. Yes, there has been serious (but guarded) talk in Mexico, for a long time, that maybe they need to build a wall too. The new Mexican administration is against this.

The upshot of all this is that … whether you like the idea or not … walls are not very expensive. I’m not sure if they are cost-effective, but a lot of governments seem to think they are: they are building them all over the world (many longer than ours), it’s been a big trend of the last 20 years, and check out this map from the Wikipedia page on border barriers to get a sense of the scope:

 

I do not know how to measure the cost-effectiveness of our current border barriers. But, it’s very interesting that both the poor and the improved estimates of the illegal immigrant population both level off after the bipartisan passage of the funding that built the barriers we now have. To me, that suggests they did their job.

BTW: Denmark wants to build a fence on its border with Germany!!! It will be 44 miles long, and is intended to keep wild boar from migrating north. At least that’s what they say: Denmark (with the happiest citizens in the world, has taken a hard turn against immigrants, so it’s useful to ask if the boar wall will serve a double purpose, given that Denmark is already fairly successful at shutting down illegal immigration at this border).

N.B. The whole discussion above about one-time expenses vs paying the Border Patrol is an example of the whole stock-flow distinction covered in Chapter III of the class Handbook, and is related to Bastiat’s arguments about both the broken window fallacy, and what is seen and not seen.

Personal and Professional Opinion: honestly, I really wish I didn’t have to talk about this issue. I don’t care that much: on net I think there are solid estimates that immigration is beneficial on net. But macroeconomically, we should be clear about two things: 1) it’s the gradient of well-being difference between countries that leads to immigration, and 2) around the world the swelling numbers of illegal immigrants reflect higher incomes in poorer countries that make travel possible at all. So, from # 1, we’re never going to get rid of this problem unless we make the U.S. poorer and Latin America richer. And, last time I checked poor people getting richer was a good thing, so # 2 suggests this issue is never going to get smaller (wall or not).

Mulling Over Capital Gains Taxation

I’ve been thinking about capital gains taxation recently: just for fun, not for class specifically.

I looked something up on Wikipedia, and came across this interesting chart:

This is good for illustrating a number of points.

First, to review, capital gains taxes are not like most other taxes. Capital gains are the increase in the value of something measured as a stock variable, between the time of purchase and the time of sale. So they are not like an income tax, sales tax, excise tax, or VAT, all of which tax flows.

Second, generally, capital gains are only paid at the time you sell. The reason for this is that the piece of capital that is gaining value isn’t gaining liquidity. Yet, we pay our taxes with money. Imagine what would happen to investment if you had to buy capital with cash, and while your cash was tied up in that capital, pay incremental amounts of cash in tax on it as it increased in value: no one would invest as much. So, the practice is that when you turn that non-liquid piece of capital into liquid money (by selling it) then we collect all the tax since you bought the item all at once.

Third, there’s been a lot of quasi-romantic discussion of how much better the world was when we had higher tax rates. Maybe so. But the goal of tax reform over the last 35 years (and not just in the U.S.) has been to lower rates while closing loopholes too. Basically, the rate is lower, but we work harder at collecting it.

Fourth, one thing that makes capital gains tax revenue unusual is that it is wildly uneven through time.

So, now what’s going on in the graph?

The red line at the top is the highest capital gains tax rate in the U.S. It has been declining.

But, people figure out ways around tax rates with tax loopholes. So the yellow line shows our estimates of what the capital gains tax rate was effectively. Note that the yellow line is closer to the red line after 1986. This is the tightening of those loopholes, in exchange for a reduction in rates, that was part of the tax reform that took place in 1986.

Lastly, notice the solid green spikes. In the two spikes on the right, the tax rate was reduced before the spike. This reflects people selling assets at that time because they were holding on to them until the tax rate was reduced.

The same effect takes place, in the opposite way with the smaller spike towards the middle. In this case, people knew the top rate was going to be raised, so they sold and paid the tax while the low rate still prevailed.

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Do note that indexing capital gains for inflation is an important part of the debate. It’s just not too important in this graph. That’s why they include the red solid area at the bottom, which scales capital gains tax payments by GDP. The spikes are smaller, but they’re still there; and also, this is one of those situations where are brains may not be very good at getting the proportions right — the red spikes might be showing percentage gains above the baseline red level that are bigger than the green spikes, but the latter so dominate our field of vision that we don’t recognize this. I’m not saying that does happen here, just that it’s not the best case of graphic design I’ve ever seen.

Recession?

Forecasting business cycle turning points (i.e., peaks and troughs) is not very accurate.

Having said that, the OECD (look that up in your Handbook) maintains a set of global leading economic indicators, and it is starting to point towards recession.

BUT, recessions are rarely global. They can be transmitted broadly like contagion, and in fact this is what happened with the recession and financial crises of 2007-9. But that’s fresh in memory; it doesn’t always work that way.

FWIW: The U.S. has its own leading indicators for our country alone, and they are not indicating recession at this time.

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The big problem in forecasting turning points is a familiar one from basic hypothesis testing (and from common experience with medical tests too).

Recall that in statistics you never know what “truth” is. All we do is state a null hypothesis, and the main goal in the choice of a null is that it can be tested, not that it’s true (although that would be nice).

Hypothesis tests give you an indication of this. We spend so much time designing experiments and tests because there are four possibilities.

• The null is true (even if we don’t know for sure), and the test can’t reject it.
• The null is true (even if we don’t know for sure), and the test can reject it.
• The null is false (even if we don’t know for sure), and the test can’t reject it.
• The null is false (even if we don’t know for sure), and the test can reject it.

We’d like our tests to always arrive at either the first or last one in that list.

In statistics, the second one is called a Type I error, and the the third one is called a Type II error.

(In medicine, the null is almost always that you don’t have what they’re testing for. A rejection is called a positive. So the second one is a false positive: you test positive, but you don’t really have the condition. That’s why you get second opinions, or re-run tests.† , The third one is then a false negative. These are a big problem in early detection of conditions).‡

In the case of forecasting turning points, the proportion of false positives and false negatives is startling. It’s often close to 50%, which is like saying the forecasts are no good at all.

So I worry a little about the fact provided in the article. They provide a false positive rate of 12.5%, and no rate at all for false negatives. Further, the OECD was around before 1970, but the article limits its sample of forecasts to after 1970, so I wonder if they’ve cherry-picked the data to make the forecasts look better than they are.

† BTW: re-running medical tests to look for false positive is not something that single payer healthcare plans take very seriously. That’s kind of a “victory” of accounting over good statistics practice.

‡ BTW: much of the high cost of healthcare in the U.S. is that we test earlier, and are paying for a lot of false negatives. On the other hand, the early detection leads to better long-term outcomes when the early test yields a true positive.

Scary Numbers About the Cost of the Government Shutdown

I do not have much professional opinion about the pros and cons of the government shutdown.

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Digression: This actually points to one of the practical problems in interpreting policy as a macroeconomist. That is, much political debate seems to be about “cheap talk”. A problem with any risk-averse committee is that difficult issues are not discussed enough, and easy issues are discussed too much. In this case, the costs of a wall are a tiny part of the budget. There’s already a wall along the most traveled parts of the border. And walls work, even if they’re not very nice. However, a wall in this case is going to do little to alleviate the problem of flailing and perhaps failing states in Central America. Oh, and Democrats used to be in favor of wall funding, except they’re not anymore … just … because … or something like that.

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I do have a professional opinion about the costs of the shutdown.

A problem in doing this sort of analysis seriously is that you have to separate anecdotes from data. What we see in the legacy media are mostly anecdotes.

A more serious estimate of the costs of the shutdown has been released by S&P Global. Based on that report, the public radio show 1A touted a figure of $7B this morning.

That’s a scary number: $7,000,000,000. (cue the Halloween noises).

Or is it?

At a minimum, it’s not good. But let’s ballpark it a bit.

It actually comes from a figure of $1.2B/week, since the start of the shutdown.

The U.S. federal government lays out about $4,000B/yr. That works out to roughly $80B/week. Of that, only about a quarter is actually shut down, so $20B/week.

And don’t forget that this is not money that will never be spent. In fact, almost all of the total that’s been accumulated will be doled out as soon as the shutdown ends, in addition to the normal spending for that week. So this is really about timing of payments.

Realistically, could the costs of mistiming spending amount to a 6% additional cost (1.2/20 = .06). That seems reasonable to me.

But, going further, the U.S. economy produces roughly $20,000B/yr in GDP. That’s about $400B/wk.

Is a cost of $1.2B/wk a lot when it comes out of $400B/wk? No, probably not. Thus the need to make numbers seem scary, and to emphasize emotional anecdotes about particular people.

Another way to look at it, is in a country of 300 million people, $1.2B/wk amounts to $16/wk for a family of four: that’s like skipping a fast food lunch for two. I wouldn’t be happy about that, but it isn’t a big deal.

The “Economists’ Statement on Carbon Dividends”

Last week, a number of prominent economists released a signed statement regarding policy approaches to potential climate change. Later it was opened for others to sign. I’ve pasted it below, and commented below that.

Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations.

I. A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary. By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future.

II. A carbon tax should increase every year until emissions reductions goals are met and be revenue neutral to avoid debates over the size of government. A consistently rising carbon price will encourage technological innovation and large-scale infrastructure development. It will also accelerate the diffusion of carbon-efficient goods and services.

III. A sufficiently robust and gradually rising carbon tax will replace the need for various carbon regulations that are less efficient. Substituting a price signal for cumbersome regulations will promote economic growth and provide the regulatory certainty companies need for long- term investment in clean-energy alternatives.

IV. To prevent carbon leakage and to protect U.S. competitiveness, a border carbon adjustment system should be established. This system would enhance the competitiveness of American firms that are more energy-efficient than their global competitors. It would also create an incentive for other nations to adopt similar carbon pricing.

V. To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in “carbon dividends” than they pay in increased energy prices.

George Akerlof, Robert Aumann, Angus Deaton, Peter Diamond, Robert Engle, Eugene Fama, Lars Peter Hansen, Oliver Hart, Bengt Holmström, Daniel Kahneman, Finn Kydland, Robert Lucas, Eric Maskin, Daniel McFadden, Robert Merton, Roger Myerson, Edmund Phelps, Alvin Roth, Thomas Sargent, Myron Scholes, Amartya Sen, William Sharpe, Robert Shiller, Christopher Sims, Robert Solow, Michael Spence and Richard Thaler are recipients of the Nobel Memorial Prize in Economic Sciences.

Paul Volcker is a former Federal Reserve chairman.

Martin Baily, Michael Boskin, Martin Feldstein, Jason Furman, Austan Goolsbee, Glenn Hubbard, Alan Krueger, Edward Lazear, N. Gregory Mankiw, Christina Romer, Harvey Rosen and Laura Tyson are former chairmen of the president’s Council of Economic Advisers.

Ben Bernanke, Alan Greenspan and Janet Yellen have chaired both the Fed and the Council of Economic Advisers.

George Shultz and Lawrence Summers are former Treasury secretaries.

Here’s my thoughts:

• The first sentence isn’t necessary, and may not even be true as it’s written (e.g., what if “immediate national action” has zero effect?). But it’s close to what many people believe, so it’s OK.
• Point I is OK as written.
• I worry about Point II, if only because “emissions reductions goals” appear to be awfully flexible in practice. If they were relatively fixed, I would not see a problem ramping up to them.
• Point III is huge, and a message that must be gotten across to those inclined towards control issues.
• Point IV is interesting, and new (to me). It sounds kind of Trump-y, but it might get at some of the issues with China’s pollution if their largest trading partner kept dinging them for their pollution.
• Point V has gotten some adverse attention in the legacy media (see the note below). I like the lump-sum idea, since marginal tax changes are distortionary. I do think it is overly optimistic that there’s some inequality here: to me it seems presumptuous to think that most people’s marginal use of carbon on which they pay is going to be less than the average use on which the rebate is based. It seems to me that many rich people might be able to turn that to their advantage, and many poor people might be unable to make it work in their situation. But, it’s a better idea than most.

A thing that an economics student should definitely pay attention to is the political mix of the economists who were the original signatories. These are not just Democrats or just Republicans. It’s a good mix, which should probably indicate that they’re in agreement on one thing: the policy “solutions” produced by elected officials and bureaucrats could be a lot worse than this one.

N.B. A problem with all of this is that the optimal carbon tax for warming abatement was shown, under reasonable assumptions (and quite a while ago) to be in the range of 30 cents per gallon. There’s a couple of problems with that. First, it’s already less than the tax on gas in most locations in the U.S.: so “immediate national action” in the first bullet point may be a lot more about de-prioritizing things government is already doing, rather than bringing in new funds. Second, people whose job it is to spend other peoples’ money tend to see a proposal like this as carte blanche to fund other programs too (most of the complaints noted in my last bullet point have been along the lines of “this would be a great source of new funding to pay for _______, rather than returning it to taxpayers”).

Why Does the Federal Government Shut Down

An excellent article by John Steele Gordon, entitled “Why We Have So Many Shutdowns”, appeared in the January 16, 2019 issue of The Wall Street Journal. You may be able to find it online, but I also saved a copy on the G drive.

I only have a few things to add.

Some people may respond that Congress is assigned spending in the Constitution, but that’s not really the case. The power to tax is given solely to Congress, but it doesn’t say much about spending decisions. So this is a new-ish thing.

Many organizations allow the executive to have a line-item veto: the power to go through the budget and “cross out” any items they don’t approve of. The U.S. President does not, and in fact the last time they were given that power, the law was ruled unconstitutional.

Presidents used to have the power of impoundment. This was taken away 40 years ago.

So, the President has veto power over the budget only. But they can’t veto something until Congress passes it.

In the present case, Trump has vowed to veto a budget that doesn’t include the wall funding he wants. But Congress hasn’t tried to pass a budget yet.

How Much Would a New and Higher Marginal Tax Rate Bracket (at the Federal Level) Bring In?

Alexandria Ocasio-Cortez (AOC) has publicly proposed a very high tax rate on very high incomes.

(Honestly, I’m not picking on her. She’s just the current face of progressives.).

Estimates of how much revenue this would bring in have now been produced by The Tax Foundation. This is a Washington D.C. think tank, that is generally for low taxes and tends to line up with the Republicans. Having said that, they’re not hacks, and are equipped to produce reliable forecasts quickly.

Here’s some ballpark numbers: the Federal government is expected to bring in $3,420B/year in tax revenue in 2019, with other branches of government bringing in $3,120B/year more.

The proposed rate and method of taxation is not quite clear, but an extra income tax bracket of 70% on incomes above $10M seems consistent with what AOC has said. The Tax Foundation runs two different possibilities.

Also, in doing tax analysis, you need to be aware of conventional/static vs. dynamic analysis. In the conventional method (preferred in D.C.), a change in taxes doesn’t change people’s behavior. In the dynamic analysis (preferred by economists), tax changes do change behavior.

Naïve announcements in the legacy media project her proposal to raise $700B over ten years.

What does The Tax Foundation forecast? No more than $300B spread over ten years, and possibly it will actually lose money (if it encourages enough rich people to shift their income out of the forms that are taxed).

So, taking the $300B/year as the most optimistic estimate, we’re talking about a 1% increase in tax revenue. That’s not going to fund much of the progressive wishlist.

BTW: AOC used her economics degree to make Steve Scalise (the # 2 Republican in the House) look foolish the other day, noting that he did a switcheroo by using average tax rates to make a point about her marginal tax rate idea. Of course, it being 2019, internet trolls ruined that whole discussion by implying violent actions.

Cool Maps: What If We Relabeled a Political Map of the World with Physical Areas In Proportion to Population Ranks? (Plus Fixed Points for the Mathematically Minded!!)

Yes, I know, that’s the kludgiest title ever. But here’s the map:

Kinda’ tells you where the future is, no?

Would you believe no one knows who created this map. The original one, that you can blow up to explore, was posted here Imgur.

FWIW: Economics Ph.D.’s, and other mathematicians will recognize that the U.S. and Brazil are fixed points in this mapping.

The Most Valuable College Majors (Optional)

Bankrate.com did a study about the most valuable college majors.

The best one was Actuarial Science (which at SUU is housed in Math, but at most schools is part of MIS in the business college).

The best business major was finance, tied at # 9.

The best social science major was economics, tied at # 16.

This is a pretty good study (unlike the flimsy ones you often see in the media). It ranks 162 majors (more than SUU actually offers), based on 2016 Census bureau data. And it doesn’t just look at the incomes of those who are employed. It also looks at how many people are unemployed within the field, as well as how many had to get a graduate degree to be paid as well as they are. That’s important: economists actually get paid more than those from Actuarial Science or Finance, but economists have more graduate degrees to get there.

This blog is primarily used for ECON 3020, which is 1) required for economics majors, 2) the most popular upper level elective for finance majors, and 3) has a dose of Actuarial Science majors scattered in.

Hat tip to my former Ph.D. students Hermann Sintim-Aboagye. He’s also my co-author, but that page doesn’t list my name (grumble grumble).