Economically Ignorant Policy Proposal Is Amongst the First from the Harris Campaign

I don't blame Harris. I blame her advisors.

And never forget that I hate Trump, so this isn't just grousing.

And I don't hate non-economists having opinions about economic issues. I do wish they would be less vocal about things they don't know.

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Anyway, Trump offered up a policy to stop taxing tips. 

Nominally, you always had to pay taxes on tips. But no one reported them. Easy to do if the tip was cash you put in your pocket.†

But you and I probably do this really rude thing: we include a tip when we tap our card. The thing is, that payment goes to the bank, then to the employer, who then forwards the tip to the employee. That makes these very easy to track. And tax. If the employers chose to report the tips; which many of them didn't since they viewed it as a pass-through.

Under one of the first fiscal policy measure to address CoVid (the CARES Act of March 2020), an Employee Retention Credit was created. This allowed for a business to offset (importantly, that is a much bigger deal than a write-off) taxes due, and perhaps receive money back (importantly, that is not a refund) if they could show their revenue was down from CoVid. This credit went to the business to help their bottom line, but in turn they had to pass a portion of the credit on to employees whose pay had been cut. This all sounds good. But, for good or bad, employers were allowed to count the tips they knew about (from credit card swipes) to make themselves more eligible for the credit. Basically, in helping service workers out they made it more likely their tips would be taxed. Oof. On the brighter side, there was a limit on the size of the claim per employee of $10K, so if you made a lot of tips, most of them could still go untaxed.

But, policymakers sell themselves by providing new "programs" or extending or expanding existing ones. So in the fourth fiscal policy to address CoVid (the American Rescue Plan Act of 2021) the Democrats included an expansion of the Employee Retention Credit. A tiny little expansion of about ... oh ... 550% in the amount that could be paid out. Or potentially a 550% increase in the amount of one's tips that might now be taxed.

By the time this came up for a vote, there was no longer bipartisan support for CoVid fiscal relief: a lot of money had already been allocated, bunches of it hadn't even been spent yet, and there were fears (that turned out to be correct) that the economy had returned to full employment and further stimulus would be inflationary. The bill passed the Democratically controlled house, but deadlocked at 50-50 in the Senate. The Vice President can cast the tie-breaking vote, and Harris did. 

To sum up, she voted to tax more tips.

Then, inexplicably, one of her first policy proposals as a candidate was to promise to not tax tips. Even though this was already Trump's policy.

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Here's the thing: not taxing tips is internally consistent with the view Republicans typically hold about labor markets, and is inconsistent with how Democrats typically view labor markets. How so?

Consider the minimum wage. This is a form of (binding) price floor. The textbook argument is that price floors are not a good idea. There are several reasons, but one is that you can't force demanders to make purchases at the floor price, so some supply goes unsold, and surpluses appear that were not there before.

Now, the labor market is backwards from most peoples' initial intuition: employers are the demanders, and employees are the suppliers. Price floors help suppliers, and the minimum wage can do the trick.

But then you run into another issue. The qualitative answer in textbooks is that some workers may lose their jobs when the minimum wage rises, since the price floor may make demanders drop out of the market. So the higher wage would only help the people who kept their jobs, but would hurt those that lose them.

Except, quantitatively, it's not clear how big that effect is. If demand is inelastic, almost no one loses their job. If demand is elastic, lots of people will lose their jobs. 

Politicians aren't actually much for hard evidence. So generally, Democrats just presume that the demand for minimum wage workers is inelastic so that minimum wage increases are beneficial to workers, and Republicans presume it's elastic so that minimum wage increases are harmful to workers. Hold that thought.

Consider tax incidence. This is who actually pays the tax (directly or indirectly) rather than who the tax is targeted at. A basic conclusion is that taxes are most incident on whomever has a more inelastic curve (because inelasticity means you can't change much, even to avoid a tax).

For example, suppose your political position is that fast food is bad and we need to discourage it. And your policy is to tax McDonald's employees (lower take home pay, so less workers, so slower food, and customers stay away). If labor demand is inelastic, that means that McDonald's can't go without employees, and eventually they will end up paying the tax for their employees so they don't go work at the hardware store.

OK, now, for good or ill, tips are currently taxed a lot more than they uses to be. So a policy to stop taxing them is like an anti-tax (or subsidy).

This makes a lot of sense if you're Trump and you view labor demand as elastic: most of the benefit of subsidizing workers by not taxing their tips will go those service workers. 

But this makes no sense if you're Harris and you view labor demand as inelastic: most of the benefit of not taxing tips will go to the employers of those service workers.

I think it's plausible that Harris' economic advisors (a group with zero actual economists) did not catch this blunder. I also think it's possible that they don't care; although this requires a cynical presumption on my part that they think the voters they're likely to attract with it are stupid.

And I absolutely get that economics can be difficult, and boring, and that no one should have to understand it if they don't want to. But having said that, I think that makes a strong case for using economic advisors that know their economics. I think potential voters trust their politicians to at least be able to do that. 

Or not: it's been about 2 weeks now, and the Harris campaign has not changed their proposal.

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For what it's worth, I had a conversation with ChatGPT about Harris' positions and it quickly noted the inconsistency. So, in principle, all Harris' advisors had to do was type a bit if they were concerned about economically sensible policy. Do note that ChatGPT is not current enough to know about Harris' positions, so I did have to input them on my own and ask it how they meshed.

† Confession: I worked for tips in the 80s, which were all in cash, and I did not report them.

Why Is Macro So Hard? What Passes for Economic Advice (Kamala Harris Campaign Edition)

Shortly before the Democratic National Convention, Kamala Harris started to announce some economic policy plans. More on the plans in another post (probably just above/after this one).

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Disclaimer 1: I am not a Harris fan.

Disclaimer 2: I do not like Trump either. The unusual thing about me, relative to others you may know with a negative view of Trump, is that mine go back much further. I grew up in the state of New York, where Trump was often in the news, and have disliked just about everything about Trump since ... probably 1983 or 1984. So yeah, I'm biased, but I don't have TDS, and I'm accused fairly often of supporting him (which is grating).

***

Anyway, the Harris campaign is demonstrating something that is a problem for both parties. It's a development over the last 15-25 years. And it tends to be worse for the Democrats.

A related point is that there is no certification for being an economist or economics advisor. If you see a CPA on TV, you can be almost certain they're an accountant. If you see an economist on TV ... you should do some digging.

The first mention that I read or heard of Harris actually having collected some economic advisors came in the piece entitled "Kamala Harris’s Economic Team and Agenda Start to Take Shape" [sic] which appeared in the Wall Street Journal on August 14. I dived right in.

You have to read until the 14th paragraph before they name names. Probably a reason for that.

Do note that this came out before the blow up about Ms. Harris proposing widespread price controls. That was probably in the works at that time. They're focus then was "... making housing more affordable, lowering costs for families, taking on corporate excess and boosting small businesses ...".

First, a few notes. 

• The NEC noted below is for National Economic Council. This is a White House office created under the Clinton administration as a substitute for the Council of Economic Advisors (CEA). The latter is staffed by economists. The former is staffed by political aides and advisors. The CEA was established in 1946 when the U.S. (and other countries) first started adopting intentional macroeconomic policies that were largely Keynesian.
• Degrees in public policy or social policy typically come from schools or colleges within universities entitled something like school of public policy. Schools of social policy are rarer, and have more of a sociology focus. In both the focus is on policy. In some, one can graduate without ever having taken a class in economics (where we do this thing where we differentiate good policies from bad ones).
• In the U.S., law students are generally not required to take classes in economics at all, although some schools have electives. It was considered really radical in 1989 when my friend Harry Butler first started offering economics for continuing education credit to Federal judges.

So here's the list of advisors:

• Brian Nelson, lawyer from Yale, unknown BA from UCLA, Under Secretary of the Treasury for Terrorism and Financial Intelligence (personal note, financial intelligence does not sound friendly)
  
• Mike Pyle, lawyer from Yale, unknown BA from Dartmouth, Deputy National Security Advisor for Internal Economics under Biden, Harris' 2020 campaign's economics advisor, member of the NEC under Obama (personal note, I wonder why the NSA needs someone who works on economics inside the country)
  
• Brian Deese, lawyer from Yale, BA in Poli. Sci. from Middlebury, director of the NEC under Biden
• Gene Sperling, lawyer from Yale, BA in Poli. Sci. from Minnesota, member of the NEC under Biden, Director of the NEC, and attorney for the Secretary of the Treasury under Obama, director of the NEC under Clinton
• Deanne Millison, lawyer from Harvard, unknown BA from Washington University in St. Louis, liason between Harris and the NEC
• Rohini Kosoglu, long time Harris advisor, MSP (masters of social policy) from George Washington, unknown BA from Michigan, domestic policy advisor in the Biden White House, aide to three different senators
• Grace Landrieu, member of the NEC, MA in Public Policy from the Kennedy School at Harvard, BA in Government from Georgetown, with a minor in Economics
• Bharat Ramamurti, a lawyer from Yale, with an unknown undergraduate major, former deputy director of the NEC, and former aide to Senator Warren

That's a list of lawyers, with only a single econ minor in the bunch.

I am a firm believer that a President or candidate should be able to choose who they want, and within broad latitude get them approved and working ASAP. 

Having said that, the choice of appointees tells us something about the candidate or President. 

And the pattern I see here is that Harris and her team don't think you need any background in economics to do economic policy.

Good luck with that.

By analogy, I wish the voters knew that the dance recital was being planned by the football coaches.

In the future, when we try to fathom why a Harris policy proposal makes no economic sense, this may be part of the reason.

Tin Foil Hat Time (Venezuela Edition)

The New York Times has gotten all sorts of bad press this week. This is over an article entitled "Venezuela's Autocrat Is Declared Winner In Tainted Election".

If you don't know the word autocrat ... it's a fancy way of saying dictator.

And it's disingenuous to claim that "... Autocrat Is Declared Winner ..." when the only people who declared that were the autocrat himself, and the government that works under him.

But these are minor points for economists. The real sticking point comes in this quote:

... In recent years, the socialist model has given way to brutal capitalism, economists say, with a small state-connected minority controlling much of the nation’s wealth.

Basically, this is just a bold lie. The problem with that is that if it's repeated enough, some people will start to believe it.

The backstory here is that Venezuela ... then the richest country in Latin America ... took a hard turn towards socialism in the late 90s. The autocrat noted above (Maduro) is the hand-picked successor to the autocrat who started the whole mess (Chavez). So really what we see in Venezuela is a three decade experiment with socialism.

It has not been pretty. And in some ways the Venezuelan government has relaxed its control over the economy in recent years. But this is mostly to help out politically connected friends. 

The article asserts that this is "brutal capitalism". No, it isn't. There's very little capitalist about it (which usually entails private ownership of capital and freely moving prices). But there is a name for a system in which the politically approved are allowed to exercise power, and make profits from the limited size of their well-connected group. The name for this is fascism (in the traditional sense, not the distorted convenience usage popular in the U.S. over the last decade). Better parallels for Venezuela's current situation would be Spain under Franco, Portugal under Salazar, Argentina under Peron, and so on. Paragons of capitalism they are not.

Oh ... and did you not the sleight of hand there ... the article writes "economists say" but doesn't actually quote any economists who do say this. Hmm.

One is left to think that the intended target for this article is people who don't understand what capitalism is, don't understand what fascism was, and are in denial about the track record of socialism.

It's been ages since I wrote anything this harsh ...

Has a Recession Begun?

Forecasting turning points is notoriously difficult (anecdotally, it is considered to be the most studied problem in human history, and it's still studied because no one can do it well). 

Very complex rules don't show much improvement, so many people don't bother. Simple rules have the advantage that people can follow them.

Real time rules are also important. The NBER Business Cycle Dating Committee does just that — it dates peaks and troughs. But it does so many months after the fact, which isn't very useful for policy.

Claudia Sahm, who was formerly an economist with the Board of Governors of the Federal Reserve System, developed a simple rule (data from FRED) that's been popular over the last decade or so.

According to that rule, the U.S. economy just peaked.

Her rule has two parts. First calculate the average employment rate over the last 3 months. Second, find the lowest monthly unemployment rate in the last 12 months. If the first is higher than the second, we're in a recession.

In the current case, the average of the last 3 months (4.0%, 4.1%, and 4.3%) is 4.13%. The lowest rate in the last 12 months is 3.5% in July 2023. Do note that the last 12 months do not include the current month.

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Just for data awareness, I note for my principles students that the typical person can only "feel" a difference in the unemployment of 0.5%. Even though we measure it down to the 0.1%., you can't feel those small changes unless they accumulate.

The U.S. economy now has an unemployment rate that is 0.9% higher than it was in April 2023. And most people would agree that jobs are a bit harder to get than they were a year ago.