Kansas and the myth of trickle-down tax cuts

December 24th, 2016 at 11:52 am

I know, you’re busy wrapping presents and such, but allow me to intrude for a brief second to make sure you saw this WSJ piece about the ongoing supply-side tax cut experiment in Kansas. This is important not just because it’s a microcosm of the Trump tax plan, designed, in fact, by some of the same dubious characters, but because of a particularly unfortunate aspect of the Kansas cuts that the trickle-downers are trying to bring to the nation: big carve-outs for pass-through income.

See the text box here for specifics of the tax changes, but back in 2012, Gov. Brownback was persuaded by some of the same folks now advising Trump to sharply cut state income taxes and to fully exempt pass-through income (income from a business that you pass-through to your personal income tax).

As the WSJ piece and much other analysis shows, not only did the growth that was supposed to offset the revenue losses fail to appear, but the Kansas economy appears to be doing notably worse than it was before the cuts. The budget’s in trouble and the state’s bond rating has been downgraded.

Needless to say, this reality has had almost no perceptible impact on the cuts’ architects. As soon as I and every other tax wonk heard about the pass-through exemption, we concluded that the incentive to restructure as a pass-through entity would be irresistible. The WSJ piece points out that the number of entities taking advantage of this new loophole turned out to be 70 percent above the state’s projections.

Steve Moore, a key trickler that pushed the plan in Kansas, didn’t see that coming:

“Sometimes it was legitimate, and sometimes it was a gaming of the tax system to pay the zero rate, so that loophole has to be closed,” he said.  “Unless you have some rules about this, people really will shift income and they’ll find ways to legally avoid paying tax, and that was never the intention.”

Who’d a thunk it?

Moore is now a Trump adviser, and while pass-through income isn’t zeroed out in the Trump plan, it is taxed at very favorable 15 percent rate.

This isn’t complicated, folks. In fact, it’s my first rule of tax avoidance: if there’s a type of income that’s privileged under the code, any putz with a tax lawyer suddenly discovers—who knew?—that’s the very type of income he or she had all along.

The WSJ includes a figure showing how job growth in Kansas is trailing the nation, but a more convincing comparison is job growth in Kansas compared to surrounding states. Regional economic conditions pose a better control than national conditions.

The first figure shows year-over-year job growth in Kansas, its four surrounding states (CO, MO, OK, and NE), and the nation. Sure enough, around the time of the tax cuts, Kansas starts drifting below the pack in terms of employment growth.

Source: BLS

Source: BLS

More recently, the control states’ line falls a bit too. This is driven wholly by Oklahoma which, of all these states, is most dependent on oil extraction, and the crash in the price of oil quickly whacked the OK job market (Kansas is much less dependent on energy jobs). That’s a good reminder of the sort of thing that actually moves the job market, versus the fairy dust claims of the trickle-downers.

Here’s another way of showing the same thing. Suppose you tried to predict state job growth using just national job growth and a trend term. You’d get a decent fit, but to be clear, this is of course not a detailed, causal model, just a correlation exercise. So I ran such a model on Kansas, stopping the estimate in 2012. Then I forecast job growth after that based on actual, national data.

Sources: BLS, my calculations.

Sources: BLS, my calculations.

National job growth handily tracks that of KA up until around when the tax cuts hit the scene. After that, the prediction consistently surpasses the actual. It’s just another simple way of showing that something happened around then that hurt the state’s employment record, and we all know the prime suspect.

But if facts could kill the trickle-down tax cut myth, it would be long dead. I harbor no illusions: there is no other economic policy I can think of that is both so actively pursued yet so clearly wrong.

OK, I promise not to bother you again until after the holiday. I’m tempted to offer you seasonally adjusted greetings, but that would be no greetings at all! (Not sure if that’s a “dad” joke or a nerd joke–pretty sure it’s the intersection of both.)

Musical Interlude: Holiday Version (and assorted other goodies)

December 23rd, 2016 at 10:55 am

Forgive me for simply pasting in an old post on the holiday music that gets the season going in my house, but I just don’t think you can improve on Lou Rawls”

Veteran OTE’ers know that the holiday season doesn’t start around here until Lou Rawls says so.  And here he goes, with the funky little drummer boy followed by the most swingin’ merry little X-mas you ever experienced.

Check out the evocative chromonica (souped-up harmonica) on the opening of Drummer Boy.

Then, on Merry Little X-mas, note how at 1:53 he breaks it down from big band into a small group with the vibes in the background.  The “blue note” that the vibes player sits on starting at 2:17 absolutely slays me every holiday season.

Let the joy begin!

Also, sticking with musical genius, if you get some downtime over the holiday, as I hope you do, allow to recommend some really exceptional TV: Season 3 of “Mozart in the Jungle” on Amazon. (You kinda need to watch earlier seasons to make sense out of what’s going on, but it’s not essential.)

To my eyes and especially ears, the show, especially this last season, somehow manages, in almost every episode, to capture the essence of the beauty of the music. Perhaps the best example was the truly remarkable episode where the orchestra (the fictitious New York Symphony) gives a concert to inmates on Rikers Island. The thing is, they—i.e., a real orchestra—actually did perform at the prison. They then interviewed actual inmates who had amazing things to say about the music.

“In the beginning, I didn’t know what was going on but then I saw the orchestra. And I said, ‘I don’t like that kind of stuff.’ So I just sat down and for the first time in my life, I enjoyed it because it’s something…something that I experienced for the first time in my life. I never experienced something like that.”

“Never heard, really, music like that. Even though I lived in New York my whole life, never went to no concert like that, nothin’ so it was an experience.”

“I just closed my eyes and I was letting the instruments just come to me and I just felt free like that, you know? It was just…it was just…a different type of feeling. Like you could say, I was in, like, a trance. Like I was here physically, but emotionally and spiritually, like, I was, you know, gone.”

And I haven’t even mentioned La Fiamma!

Finally, come the new year, Ben Spielberg and I plan to produce a new podcast based on much of the material you see here at OTE and more. We’ll discuss the economic problems and solutions of the day, amongst ourselves and with guests, with an emphasis on the intersection of politics, economy, policy, and power. Episode 1, currently in production: Finding the path back to Factville. So stay tuned!

Inequality, technology, globalization, and the false assumptions that sustain current inequities

December 22nd, 2016 at 3:24 pm

Here’s a great interview with inequality scholar Branko Milanovic wherein he brings a much-needed historical and international perspective to the debate (h/t: C. Marr). Many of Branko’s points are familiar to my readers: yes, increased trade has upsides, for both advanced and emerging economies. But it’s not hard to find significant swaths hurt by globalization, particularly workers in rich economies who’ve been placed into competition with those in poorer countries. The fact that little has been done to help them is one reason for president-elect Trump.

As Milanovic puts it:

The problems with globalization arise from the fact that gains from it are not (and can never be) evenly distributed. There would be always those who gain less than some others, or those who lose even in absolute terms. But to whom can they “appeal” for redress? Only to their national governments because this is how the world is politically organized. Thus national governments have to engage in “mop up” operations to fix the negative effects of globalization. And this they have not done well, led as they were by the belief that the trickle-down economics will take care of it. We know it did not.

But I’d like to focus on a related point from Branko’s interview, one that gets less attention: the question of whether it was really exposure to global trade or to labor-saving technology that is most responsible for displacing workers. What’s the real problem here: is it the trade deficit or the robots?

Branko cogently argues that “both technological change and economic polices responded to globalization. The nature of recent technological progress would have been different if you could not employ labor 10,000 miles away from your home base.” Their interaction makes their relative contributions hard to pull apart.

I’d argue that the rise of trade with China, from the 1990s to the 2007 crash, played a significant role in moving US manufacturing employment from its steady average of around 17 million factory jobs from around 1970 to 2000, to an average today that’s about 5 million less (see figure below; of course, manufacturing employment was falling as a share of total jobs over this entire period).

Source: BLS

Source: BLS

The relative trade balances, shown in the next figure, underscore this point, as China’s surplus grew sharply in the 2000s while the deterioration of our trade deficit accelerated (source: Autor et al; I’ll discuss the reversal of these trends below).

Source: Autor et al

Source: Autor et al

Finally, the “robots did it!” story requires an acceleration in productivity growth. The next figure shows manufacturing productivity growth (yr/yr) since 1987 (also, read Sue Houseman’s very important work for the full story here). It’s awfully jumpy, so I’ve plotted a 5-yr rolling average. There’s a bit of acceleration in the 1990s or 2000s, and I’m not denying automation has played a role in the pattern in the employment figure above. But it’s unlikely to be the whole story and that story is particularly strained today, as manufacturing productivity growth has crashed in recent years.

manprod16

But my main point here is that it’s a mistake to either believe that trade and technology are clearly separable forces, or to think that it matters to workers which force is displacing them. Too often, policy makers seem to assert that, because “it’s not trade, it’s technology!”—typically offered without much evidence—displaced workers should somehow be assuaged. Hey, all they need to do is go from running a drill press to designing, building and programming drill-press-running robots!

True, trade and China are much more tangible targets, and I get that they sometimes carry more symbolic weight than they should. That’s particularly true regarding China right now, which is trade enemy #1 in the Trump playbook, despite the fact that their trade surplus has been falling and, if anything, they appear to be trying to prop up the value of their currency (the trade play is to depreciate).

But remember, automation and labor-saving technology are ongoing forces that have been with us forever. Historically, increased demand for the extra output created by faster productivity growth absorbed displaced workers, sometimes in new sectors.

We must understand why that hasn’t happened in recent years. The productivity evidence over the past decade contradicts an accelerating automation explanation. I think the evidence instead supports an explanation that exposes false assumptions:

–the winners from expanded trade would compensate the losers
–regressive tax cuts would trickle down
–trade deals centered on corporate interests would somehow help laborers
–full employment would automatically persist (even in the face of large, growth-draining trade deficits)
–austere fiscal policies amidst weak private demand would magically have anything other than their predicted, negative effect on growth
–the safety net, minimum wages, and other labor standards must be diminished to create the right micro-incentives

All of the above distribute income upward, and not just income, but just as importantly, power and the political influence that makes reversing these false assumptions an extremely heavy lift. The system effectively insulates itself from progressive change.

I don’t have the answer to the question of what breaks this extremely damaging chain, but I’m sure it involves some serious organizing of the many hurt by this dominant agenda against the minority helped by it. At any rate, a good place to start is a clear-eyed identification of the problem.

More from the 2017 ERP, outsourced to E&E

December 21st, 2016 at 12:37 pm

[Emily Horton (research asst.) and Emma Sifre (budget intern) are colleagues of mine at CBPP. Just to mix things up a bit, I asked them to choose a figure from the new 2017 ERP and write a bit of text to go with it (I’m featuring figures from the ERP this week). I think they made excellent choices!]

EH:

I think my favorite charts are the ones on changes in labor force participation.  These explain a lot about the striking divide between negative public perceptions of the labor market and the very low unemployment rate [and why we’re not really yet at full employment–JB]. It’s also (obviously) an important chunk of the narrative around recent political dynamics. [Yep–especially when you break the trends out by education level, as in the figure.–JB]

Source: 2017 ERP

Source: 2017 ERP

I also think this one on the quality of the US healthcare system is a real zinger.  I hear the argument that even though we pay a lot for healthcare, we have a great healthcare system, and increasing the level of publicly provided health care hurts the overall system. This next chart is a great response to the assumption that our system was in any way superior to other countries’ pre-ACA.

Source: 2017 ERP

Source: 2017 ERP

ES:

Figures 7-5 and 7-1 show that there is a compelling economic case to be made for reducing the United States’ environmental impact. The claim is often that economic regulations stifle firm productivity and overall economic growth, but Figure 7-5 shows the opposite: As energy and carbon consumption have decreased, GDP has grown steadily, indicating that emissions are not a necessary byproduct of strong economic growth.*

But not only is it possible to achieve robust growth while producing fewer harmful emissions, it also makes fiscal sense. Figure 7-1 shows that the number of extreme-weather events that have cost more than $1 billion in damages has risen markedly over the past three decades. Curbing emissions in an effort to reduce the frequency and intensity of these kinds of natural disasters could save the United States billions of dollars in the long-run. Together, these graphs make a clear economic argument that reducing harmful emissions can help reduce costs associated with climate change without placing undue strain on the economy.

[Word to that conclusion!–JB]

Source: 2017 ERP

Source: 2017 ERP

Source: 2017 ERP

Source: 2017 ERP

*A few complementary points here from JB: First, Figure 7.5 lacks a counterfactual. A stronger case requires a model-based estimate of how real GDP would evolve with more or less emissions. Second, a few figures down (7-7), CEA shows the decline in energy intensity per dollar of GDP, underscoring Emma’s point: “The fact that the U.S. economy is using less energy while continuing to grow reflects a decline in overall energy intensity that is due to both more efficient use of energy resources to complete the same or similar tasks and to structural shifts in the economy that have led to changes in the types of tasks that are undertaken.”

Thanks to E&E for their contributions. Note that I asked them each for one graph and I got two (Emily sent three!). Clearly, they’re not constrained by my instructions, implying that they’ll both go far!

Keepin’ it real on the growth slowdown: the first of many factoids from the 2017 ERP

December 20th, 2016 at 4:19 pm

President Obama’s Council of Economic Advisers just released their final Economic Report of the President and it is the perfect holiday gift for your favorite econo-nerd. (It’s also, I fear, the last cogent ERP we might see for a bit.)

So, for the next few days, I’ll highlight some of the arguments in there that really resonated with me and some of my colleagues.*

Episode 1:

Whenever people bemoan the slowdown in GDP growth in recent years, part of me moans with them but part of me doesn’t, because some of the growth deceleration is a function of slower population growth. Remember, growth is basically productivity plus labor input, and an aging population tends to slow the latter.

Thus, whenever you’re making long-term historical comparisons over periods where this population growth factor is in play, you must account for it, by looking not simply at real GDP growth, but at some measure of per-capita growth.

Think of it this way. Suppose GDP’s growing at 3 percent, and the population is growing at 1 percent. Thus, GDP/capita is growing at 2 percent. Now, suppose both slow half-a-percent. You could complain about slower aggregate growth, but on a per-capita basis, growth hasn’t changed at all. And that means there’s the same amount of income per person to go around (obviously, we’re not talking about inequality yet–that’s to come in later posts).

The figure below shows the sharp deceleration in the growth rate of the working-age population, meaning we’d expect overall growth to slow, just based on the decelerating trend of this input.

Source: 2017 ERP

Source: 2017 ERP

The next figure is one I made, but totally ripped off from the ERP (Fig 2-viii; I remade it so I could calculate the “slowdown” bar, which isn’t in their figure; the current cycle looks a little different in my figure, maybe because I used more recent data). Overall GDP growth slows by a very significant 1.9 percent in the first set of bars. But the deceleration is half that much if we use the working-age population, and about a third if we look at “per labor-force participant.” (I’d argue that the slowdown under this latter measure is a bit biased by weak labor force participation having to do more with insufficient demand than demographics; i.e., it’s “endogenous”.)

Source: My version of Fig 2-viii from 2017 ERP, (BEA, BLS)

Source: My version of Fig 2-viii from 2017 ERP, (BEA, BLS)

Trust me when I tell you that none of us is downplaying the importance of that slower growth rate under these working-age population-adjusted measures. If anything, those negative bars represent what I (and I believe CEA) consider our most pressing macroeconomic challenge: the slowdown in productivity growth (about which the ERP has many excellent figures which I’ll parade out soon).

But it is somewhere in between incomplete and misleading to complain about the slowdown in GDP growth without accounting for the sharp slowdown in the growth of the working-age population.

*Do not confuse this with my Best CBPP Charts of 2016, as that’s still to come. IKR!: an embarrassment of riches.