John Cochrane makes the case for a progressive value added tax

A thorough blog post by the University of Chicago's John Cochrane on the virtues of a value added tax, tailored for the U.S. 

I’m proposing a VAT and nothing else, and let’s put all the cross-subsidies and mandates on budget where we can see them. If we make it progressive, the highest rates hit levels that would please Piketty. I’m not sure there is a lot more to squeeze out of this! 

Anthony Saunders of Confounded Interest; "Bubbles Shiller P/E Ratio Nears Roaring ’20s Bubble High As Home Prices Increased 43.6% Since Feb ’16"

"Asset bubbles too are difficult to define, but I know it when I see it."
Enough said.

Recent paper on public finance: Examining capital taxation

A new paper from France:

This article addresses the issue of capital taxation relying on three levels of analysis. The first level deals with the multiple ways to tax capital (income or value, proportional or progressive taxation, and the temporality of the taxation) and presents some of France's particular features within a heterogeneous European context. The second area of investigation focuses on the main dynamic properties generated by capital taxation: the principle of equivalence with a tax on consumption; the issue of double taxation if it targets taxation of nominal income; neutrality of the uniform tax on the capital value; lastly, the risk of confiscatory taxation if there is a disjunction between taxation of the value and the income. The final level of analysis consists in assessing the debate on the optimal level of capital taxation drawing on the lessons in the literature. These discussions are organized into eight themes: (1) double taxation, (2) optimal growth, (3) property, (4) tax competition, (5) supervisory arguments, (6) measuring capital gains, (7) complexity and (8) fiscal stability.

The authors are Céline Antonin and Vincent Touzé.

Scott Sumner: We don't need steel tariffs for national security

Reprinted from the Foundation for Economic Education

We Don't Need Steel Tariffs for National Security

The Financial Times reports that the Trump administration is considering steel tariffs:

The US has set the stage for a global showdown over steel, launching a national security investigation that could lead to sweeping tariffs on steel imports in what would be the first significant act of economic protectionism by President Donald Trump.
The decision to use a 1962 law allowing the US government to limit imports that threaten its security readiness is intended to deliver on Mr Trump's campaign promises to bolster heavy industry and "put new American steel into the spine of this country", officials said on Thursday.

A few observations:

1. Congress erred in delegating to the executive branch the power to set national security tariffs. Almost any industry could be deemed essential for "national security."

2. The US steel industry currently produces about 80 million tons per year. That's more than enough to meet our essential military needs. And this doesn't even account for the fact that steel production could be increased, as we are not operating at capacity. Yes, it might take a bit of time to bring mothballed plants back online, but as the following quotation suggests, new weapons now take far longer to develop than they did back in WWII:

Civilian manufacturing capacity is now ALMOST ENTIRELY USELESS for defense purposes. Whereas in WWII, auto assembly lines could be used to make planes & tanks, and Singer made guns instead of sewing machines... Now all but the most basic defense products (personal firearms, sewing of uniforms, etc) must be made by specialized expert-firms. Super-weapons such as the F-22/F-35, M1A3 Abrams (it's under development now), and whatever we make when we finally field a next-generation artillery piece (cancelling the Crusader was a mistake, btw) require such a specialized knowledge-base & facilities, that they MUST be made by a dedicated defense industry - something we have (on a best-in-the-world level). Re-purposing a factory that built 2-ton SUVs to build 70-ton tanks just isn't happening. Even if it could, how much experience does your average auto-worker have in assembling uranium-ceramic-steel-composite armor properly, so as to maintain it's ability to take 125mm KE hits?
A final point on this issue, is that modern war moves too fast to 'develop and manufacture new products after the fact, using civilian industries'. It's a 'run what ya brung' sort of affair

And this doesn't even account for the fact that the US would likely have access to steel produced in friendly countries such as Canada, Mexico, Brazil, Japan and Germany. Sure, one could construct scenarios where some of that steel is cut off in a war (i.e., Japanese exports are disrupted by a war with China, or German exports in a war with Russia), but unless the US is fighting the entire world at once, we'd surely have access to at least some markets. And if steel imports really were cut off, where would we get our iron ore? Today we don't need much iron because of our use of scrap metal. But if we stopped building cars during a war, then far less scrap metal would be available. This also fails to account for the fact that warfare in the modern world tends to be asymmetric. The threat of nuclear annihilation means that we fight small countries, not large nuclear powers.

The development of missile technology tends to make steel-intensive weapons (such as ships and tanks) more of a "sitting duck" than in the old days. I recall that a single Argentine missile took out a British destroyer in the Falklands War--and that was way back in 1983. Think about today's cruise missiles, and also consider that the sort of powerful adversary that would require the US to have a massive steel industry would be far more militarily advanced than Argentina in 1983. I'm not expert on modern weapons, but I'd wager that in today's warfare a big steel industry is less important than back in WWII.
If steel prices rise, other American manufacturers (cars, white goods, etc.) would be put at a competitive disadvantage to imports.

3. One possibility is that the national security argument is simply being used as an excuse to save jobs in the steel industry. As an analogy, recall that when Trump campaigned for President he promised to ban Muslim immigration. When Rudy Giuliani told him that this was a legally dubious proposal, Trump asked for a version of the plan that would be accepted by the courts. This led to the recent dispute over the ban on immigration from seven (later six) majority Muslim countries.

I don't have strong views either way on whether Trump's immigration ban was legal. But I will say that the legal argument for protecting the US steel industry on national security grounds seems far less plausible than the claim that the immigration ban protects national security (and I'm dubious of even that claim.) So you might expect the courts to question the steel tariffs on exactly the same grounds they challenged the immigration ban---Trump is on the record favoring this sort of action on entirely different grounds---jobs. On the other hand, courts have tended to show more deference to the government on economic regulation than on civil rights/equal protection issues, so I'm not making any predictions here.

4. It is likely that a suitably high steel tariff could save some jobs in the US steel industry. However, it seems much less likely that this would serve Trump's broader goals of restoring jobs in manufacturing. Tariffs protect industries by driving up the price of the commodity being imported. But if steel prices rise, then this puts other American manufacturers (cars, white goods, etc.) at a competitive disadvantage to imports. Mexican firms making cars or washing machines would be able to buy steel more cheaply than American manufacturers, and this would cost jobs in other sectors of the US economy. The net effect on the total number of jobs in manufacturing is likely to be pretty trivial, and could be either positive or negative.
5. Policies based on metaphors that romanticize and/or anthropomorphize the economy are unlikely to be wise:

The decision to use a 1962 law allowing the US government to limit imports that threaten its security readiness is intended to deliver on Mr Trump's campaign promises to bolster heavy industry and "put new American steel into the spine of this country", officials said on Thursday.

Sorry folks, those days are long gone.

Scott Sumner

Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.

This article was originally published on FEE.org. Read the original article.

Republished from EconLog.

Tyler Cowen: U.S. Can Afford Trump's Radical Tax Cut

Cowen clears away the muddled, ill-formed thinking from Trump's critics: 

This argument for a corporate tax cut -- “let’s borrow more now while rates are relatively low” -- is remarkably like the argument that Keynesians have been using for more government infrastructure spending for years. The main difference is that here the spending would be done by private corporations rather than the federal government. You may or may not believe the private expenditures will be more socially valuable than the government expenditures, but if you think we can afford one kind of stimulus we probably can afford the other. And as I said, the private rate of return on investment probably is higher than the government’s borrowing rate, even if you think that government spending would yield higher returns yet.

To put it bluntly, I am suspicious of ideological motives when anyone says we can afford a big dose of government stimulus but we cannot afford a corresponding private stimulus. The more consistent view is that we probably need more investment on both fronts, and thus cuts in the corporate tax rate are a welcome start, at least if we put aside the pessimistic scenario mentioned above. It’s still legitimate to consider whether a plan should include more government stimulus (Trump himself would probably agree, though Congress may not), but that’s a very different point from claiming the U.S. cannot afford a corporate tax cut. In addition, you also might think that some other taxes should go up, such as consumption taxes, but even if true it does not mean the corporate rate cut is unaffordable.

Read the whole column at Bloomberg. 

A brief analysis of last week's Massachusetts jobs report

My analysis of last week's MA Jobs Number and URate.

WalletHub: 2017’s Best & Worst States for Children’s Health Care

What is interesting are the results for New Hampshire a state in which the social safety net is small compared to a state like Massachusetts.

Source: WalletHub

A look at the City of Boston's capital spending plan for FY2018-FY2022

Titled, "Ambitious City Projects Benefiting from Building Boom in Boston," https://shar.es/1F3Fbr, the article examines the good luck Boston's enjoying as a result of the building boom. 

FEE: "The CPI is a False Guide for Monetary Policy"

An Austrian economist, Richard M. Ebeling,  takes on the Consumer Price Index.

The pricing subcategories highlight the smoke and mirrors that is the statisticians’ distinction between overall and “core” inflation. People will occasionally enter the market to purchase a new stove, couch, or bedroom set, and if the prices for these goods happen to be going down, or slowly rising, we may sense that our dollar is going further than in the past.

But buying goods like these is an infrequent event for virtually all of us. On the other hand, every one of us are in the marketplace paying for food, gas for our cars, paying heating and electric bills on a regular basis. The prices of these goods and services, in the specific brands and combinations that we as individuals choose to buy, are what we personally experience as a change in the cost-of-living and our personal rate of price inflation (or price deflation).

The Consumer Price Index is an artificial statistical creation, derived from thousands of individual prices, a statistical composite that only exists in the statistician’s calculations. It is the individual goods in the subcategories of goods that determine the change in the cost-of-living and the degree of price inflation (or deflation) that we each experience.

Read the whole article here.

Maybe energy taxes are not so regressive after all

A new NBER paper by William A. Pizer and Steven Sexton suggests that energy taxes levied to curb carbon emissions may not be as hard on low income consumers as commonly believed.

Despite popularity among economists for their efficiency, energy pollution taxes enjoy less political support than standards-based regulation because of common perceptions that they burden the poor relative to the rich. However, the literature on pollution tax incidence and consumption surveys in Mexico, the United Kingdom, and the United States, suggest energy taxes need not be as regressive as often assumed. This paper demonstrates that the incidence of such taxes varies according to the energy commodities that are taxed, the physical, social and climatic characteristics of jurisdictions in which they are implemented, and how the revenue is used. It is also shown that the variation in household energy expenditure within income groups is greater than variation across income groups in many cases. These horizontal equity impacts are reviewed, as are their implications for policy making.

The relationship between educational attainment and enrollment in disability insurance programs

From James M. Poterba, Steven F. Venti, David A. Wise, "The Long Reach of Education: Health, Wealth and DI Participation:"

Between 1972 and 2012, the fraction of the population with low levels of education has declined dramatically and the fraction with higher levels of education has increased. This change in the composition of educational attainment in the population places downward pressure on disability rates. Our estimates suggest that over the past two decades, the upward pressure on DI rates arising from increasing educational disparities in health, wealth and employment has been roughly offset by the downward pressure arising from the declining fraction of the population with low levels of education. 

The debate on what to do about income inequality intensifies

Or, is the debate shifting to one about semantics?

From Fatih Guvenen and Greg Kaplan in a new NBER paper.

We revisit recent empirical evidence about the rise in top income inequality in the United States, drawing attention to four key issues that we believe are critical for an informed discussion about changing inequality since 1980. Our goal is to inform researchers, policy makers, and journalists who are interested in top income inequality. Our analysis is based on a reexamination of publicly available detailed statistics from two administrative data sources: (i) Internal Revenue Service (IRS) data on total incomes (labor income plus capital income), reported in Saez (2012), and (ii) individual-level micro data on labor income (wage plus self-employment income) from the U.S. Social Security Administration (SSA)  reported in Guvenen et al. (2014).

One key take-away:

Put simply, so far in the 21st century, all the action in top income shares has been S-corporation income at very, very high income levels.

National Bureau of Economic Research Working Paper 23321.

Can a carbon tax be progressive?

From Vertical and Horizontal Redistributions from a Carbon Tax and Rebate by Julie Anne Cronin, Don Fullerton, Steven E. Sexton

Abstract: Because electricity is a higher fraction of spending for those with low income, carbon taxes are believed to be regressive. Many argue, however, that their revenues can be used to offset the regressivity. We assess these claims by employing data on 322,000 families in the U.S. Treasury's Distribution Model to study vertical redistributions between rich and poor, as well as horizontal redistributions among families with common incomes but heterogeneous energy intensity of consumption (different home heating and cooling demands). Accounting for the statutory indexing of transfers, and measuring impacts on annual consumption as a proxy for permanent income, we find that the carbon tax burden is progressive, rising across deciles as a fraction of consumption. The rebate of revenue via transfers makes it even more progressive. In every decile, the standard deviation of the change in consumption as a fraction of consumption varies around 1% or 2% and is larger than the average burden (about 0.7%). When existing transfer programs are used to rebate revenue, the tax and rebate together increase that variation to more than 3% within each decile. The average family in the poorest decile gets a net tax cut of about 1% of consumption, but 44% of them get a net tax increase. Relative to no rebate, every type of rebate we consider increases this variation within most deciles.

Link: NBER #23250 

March 2017 Jobs Report: Rate drops to 4.5 but economy only adds 98,000 jobs

OVERVIEW

• The unemployment rate declined to 4.5 percent in March while payrolls expanded by 98,000, according to the Bureau of Labor Statistics.
• The Labor Force Participation (LFP) rate remained at 63.0 percent. 
• The number of persons working part-time for economic reasons was little changed at 5.6 million. 
• The number of those individuals “marginally attached to the labor force,” also remained unchanged.
• Retail jobs lost 30,000 positions in March.  General merchandise stores declined by 35,000. 
• Following gains of 219,000 in February and 216,000 in January, March employment only edged up by 98,000. 
• Mining added 11,000 bouncing back from an October 2016 low. 
• Professional and Business Services led the gains by adding 56,000 jobs. BLS reports the growth in this sector has kept pace with the average monthly gain over the past 12 months.
• The previous two months’ figures were revised downward. January’s report was revised downward from 238,000 to 216,000 and February’s report was revised downward from 235,000 to 219,000 jobs. 

ANALYSIS

The unexpectedly weak jobs report— along with the downward revisions to January and February numbers —suggest there may be something more at work than last month’s weather. Wall Street expected a gain of 175,000 jobs.

Moreover, today’s report stands in stark contrast with the ADP report released this week estimated the addition of 263,000 jobs in March.

Professional and Business Services continued to notch gains on the strength of “services to buildings and dwellings (+17,000) and architectural and engineering services (+7,000). The Health Care sector continues to post jobs gains with 20,000 per month for 2017. Construction employment changed little, however today’s report noted that jobs have “been trending up since late last summer, largely among specialty trade contractors and in residential building.”

The average workweek was unchanged at 34.3 hours. Average hourly earnings for all private sector employees increased by 5 cents to $26.14, following a 7-cent increase in February.

Over the past year, these earnings have increased by 2.7 percent.  The retail sector continues to struggle, with major firms announcing job cuts and store closings. Approximately 15.8 million workers have jobs in the retail sector, overall.  

Of that number, 3.1 million are in general merchandise stores representing 19.6 percent of the retail workforce. The slowly growing but influential and tech-driven “non-store” retail sector comprises 3.5 percent of the retail workforce.  In March 2016 nonstore retailers employed 521,800 workers compared to 555,700 workers today, a gain of 33,900 workers.

PDF version of Research Note

February Report: Massachusetts adds 10,100 jobs; U-Rate at 3.4 percent

My latest research note, on the most recent Massachusetts jobs release, can be found here.

Is the gig economy's flexibility an asset to labor markets?

Sure to add to the debate about the sharing/gig economy.  "The Value of Flexible Work: Evidence from Uber Drivers" by M. Keith Chen, Judith A. Chevalier, Peter E. Rossi, Emily Oehlsen

Participation in flexible contract work has increased dramatically over the last decade, often in settings where new technologies lower the transaction costs of providing labor flexibly. One prominent example of this is the ride-sharing company Uber, which allows drivers to provide (or not provide) rides anytime they are willing to accept prevailing prices for this service. An Uber-style arrangement offers workers flexibility in both setting a customized work schedule and also adjusting it throughout the day. Using high-frequency data of hourly earnings for Uber drivers, we document the ways in which drivers utilize this real-time flexibility and we estimate the driver surplus generated by this flexibility. We estimate how drivers' reservation wages vary in high frequency from hour to hour, which allows us to study the surplus and supply implications of both flexible and traditional work arrangements. Our results indicate that, while the Uber relationship may have other drawbacks, Uber drivers benefit significantly from real-time flexibility, earning more than twice the surplus they would in less flexible arrangements. If required to supply labor inflexibly at prevailing wages, they would also reduce the hours they supply by more than two-thirds. The implications of our findings for the future of flexible work are discussed. 

It comes down to the willingness to supply more labor.

Gated version of the paper is here.

Revised Gross Domestic Product 4th Quarter 2016: 2.1$

Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the fourth and final quarter of 2016. This latest report is the third estimate of U.S. GDP from the Bureau of Economic Analysis. Real GDP for 2016 grew at a 1.6 percent. 

Here is my commentary on yesterday's report.