Et tu, Burger King?

August 25th, 2014 at 12:07 pm

An American company that wears a crown and makes French fries wants to put its tax mailbox in Canada. Welcome to the global economy. Over at PostEverything.

Actually, this particular inversion carries an important lesson: the countries that understand the above–the pressures that globalization puts on domestic economies–and take steps to dampen the harm and amplify the good, will have much better economic outcomes than those like us that so far resist this lesson.

The Corporate Tax: Mend It Don’t End It (and a GIF that tells a thousand words)

August 25th, 2014 at 11:57 am

This recent rush by US companies to move their mailboxes abroad for tax purposes–so called “inversions”–has led to an increase in calls to abolish the corporate tax. And, to be fair, those calls started long ago based in no small part on the extensive loopholes that plague the corporate code.

Still, while I’m not defending our current business tax code, as I argue over at the Upshot, I’m convinced it would be a big mistake to end it, as opposed to mend it. As noted in the piece, those who would scrap it propose other ways to claw back the lost revenue but I don’t think they would work. Thus, I view this idea as creating yet another avenue for tax avoidance among those with the highest incomes. And that’s a bad idea.

If you don’t have time to read it, just look at the awesome GIF that sits next to the piece. Tells pretty much the whole story.

Chair Yellen Looks Under New Rocks, Finds Same Thing that’s Under Old Rocks

August 24th, 2014 at 11:12 am

I yield to no one in my admiration for the careful, thoughtful, and reality-based economics practiced by Fed Chair Janet Yellen. So I was taken aback a bit by a section in her Jackson Hole speech on Friday.

It was the part where she gave a number of reasons why the absence of wage pressures may not, paradoxically, be signaling that considerable slack remains in the job market, and therefore, may not be signalling that the Fed should wait on raising rates to stave off faster inflation.

I certainly appreciate bending over backwards to look for reasons why the obvious may not be correct—i.e., why the lack of wage growth might not be the sign of job market weakness I think it is. Sure, one should always shave with Occam’s razor, but you can knick yourself if you shave too close.

Still, I don’t think that’s the case at all here. To the contrary, each of her three reasons look like additional reasons not to slow the economy and preempt wage growth by tightening too soon. She’s right to look under new rocks, but as I see it, she found nothing new there.

The three “rocks” are:

nominal wage rigidity: because employers tend not to reduce nominal wages—it’s bad for morale—they don’t need to offer raises now as the job market’s improving. The implication is that diminished slack would not, as expected, be reflected in faster wage growth.

OK, but if this analysis is correct then the key question is “what does the absence of wage pressures–due not to labor market slack but to rigid wages–imply for monetary policy right now?” And the answer is: it implies that until inflation erodes real wages enough to generate more employment demand (i.e., moving down the demand curve), or until there’s enough labor demand to necessitate hiring at current real wage levels (i.e., the demand curve moves out), there’s no reason to tighten.

structural (i.e., longer-term, non-cyclical) forces that are reducing labor’s share of national income: Yellen cites the role globalization is playing in holding down wage growth for those negatively affected by international trade (I’d add imbalanced trade, as per here). Moreover, she connects this development to the decline in labor compensation as a share of national income and the analytically related point of real compensation growing more slowly than productivity.

But again, go back to the question in italics posed above (is this a reason to tighten sooner than later?). As Dean Baker and I recently wrote, “wage growth paid for by a shift back toward to a more normal split between wages and profits is non-inflationary.” It will take very tight labor markets to rebalance “factor income shares” (the profit and wage shares of national income) and to offset the damage to labor demand and worker bargaining power from imbalanced trade. So here again, pre-emptive tightening is contraindicated.

–depressed labor force participation that could be reversed by stronger demand: Here Chair Yellen pointed out that because millions of workers have left the labor force due to persistently weak demand, “transitory wage and price pressures could emerge well before maximum sustainable employment has been reached, although they would abate over time as the economy moves back toward maximum employment.” That is, depressed labor supply might lead to wage pressures in the near term, but as labor demand strengthened, those sideliners would get pulled back in which would then dampen those pressures, due to the added supply effect.

Even more so than the other two reasons, this one especially calls for extended monetary support of the job market. If we hope to raise the economy’s potential growth rate, it is essential for labor demand to strengthen enough to reverse that portion of the decline in labor force participation that’s reversible—the part due to weak demand (I’d argue that’s about half of the three percentage point decline, over two million workers).

So, not to put too fine a point out it, each of the three reasons Chair Yellen gave as to why the lack of wage pressure may not signal labor market slack actually point in the same direction in terms of monetary policy, as does the conventional wisdom that wage growth is weak because the job market is weak. Good for her for looking under interesting rocks to test the simple story, but what she found there leads to the same policy prescription: hold off on tightening.

Chair Yellen Needs Many Hands to Juggle Income Data

August 22nd, 2014 at 1:30 pm

I review the Fed chair’s Jackson Hole speech from earlier this AM, over at PostEverything.

It’s–appropriately–a lot of “on the one hand, this…on the other hand, that.” And while no one should deify the Fed chair, that does bring the following image to mind:

At times when the data are ambiguous, this Goddess would make a great economist.



Inflation Erodes Assets: That’s Why Some People Fear It

August 22nd, 2014 at 8:51 am

Paulie Walnuts Krugman has a nice piece out this AM on why the central bank should downweight the views of those who’ve been wrongly crying hawk wolf re inflation for years now. I’ve made the same point as the din of voices urging the Fed to pre-emptively tighten is getting louder.

One point to add: Paul writes that it’s “less clear” why “the inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.”

I think at least part of the answer is a rule of thumb I’ve been mentally toting around since I read about it 30 years ago: unemployment hurts the poor, inflation hurts the rich.

Obviously, like any such rule, it’s overstated. High and rising inflation hurts everybody, and capital income has taken big hits in recent recessions (though the top 1% has consistently bounced back well ahead of the rest).

But inflation erodes asset values, not unlike a tax on capital gains, and generally speaking, those who depend on portfolios vs. paychecks are going to be less sensitive to unemployment. So, as Paul stresses, they have a class interest to advocate for heading off inflation, even if it’s a phantom menace, while at the same time worrying not so much about the impact of tightening on those who depend on a tight job market.


Back away from the funds rate and nobody gets hurt.