A verse for Trump as he meets w/ Yellen on Thursday

October 18th, 2017 at 8:15 pm

Trump’s meeting with Fed Chair Janet Yellen tomorrow. Here’s some free advice, in verse!

When it comes to Cohn,
Leave him alone.

I worry that Powell
Might throw in the towel.

Sorry to be harsh
But do not go with Marsh.

We’ve all seen the trailer
Don’t be ruled by Taylor.

By now you’re probably smellen’
The idea that I’m sellen’
Steady as she goes, Trump:
Stick with Yellen.

For a bit more substance, here’s a piece from a few weeks ago about why reappointing Chair Yellen is the right move, not just for the economy, but for Trump himself. That said, I recognize that rational choice ain’t exactly ruling the day.


October 17th, 2017 at 8:49 am

Over at WaPo, thoughts on strengthening a weak link in our tax system: that between asset appreciation and tax revs.

Also, re NAFTA, mend end but don’t end it. And less fear mongering over tariffs. I don’t want to see them either, but the extent to which the reporting has largely featured advocates of the status quo got under my skin a bit.

Muscular Larry Summers takedown of those implausible results out of Trump’s CEA yesterday.

I got issues with the new CEA report

October 16th, 2017 at 9:54 am

First, full disclosure: Kevin Hassett, the chair of Trump’s CEA, is an old friend, a good dude, and a guy I’m happy to see in this prominent post. But even as I endorsed him for the job, I publically worried about one area of his research where his claims go way beyond the evidence and ignore the counter-evidence. That area is the impact of tax cuts on growth, jobs, and particularly wages and incomes.

Thus, CEA’s new report on the wage-boosting effects of the proposed cut in the corporate rate from 35 to 20 percent looks fatally flawed to me. It is a literature review that picks only the ripest of cherries, ignoring the large body of literature that goes hard in the other direction.

A particularly notable example of this problem is a citation of one study by tax analyst Jane Gravelle (et al) that CEA uses to support their thumb-on-the-scale results, while ignoring another Gravelle (et al) study that directly debunks CEAs main thesis that corporate rate reductions boost workers wages.

Worse, the Gravelle (et al) study that CEA ignores specifically and critically reviews the papers upon which CEAs work depends, including one by Hassett (et al) himself:

Cross-country studies to provide direct evidence showing that the burden of the corporate tax actually falls on labor yield unreasonable results and prove to suffer from econometric flaws that also lead to a disappearance of the results when corrected, in those cases where data were obtained and the results replicated.

One of those cases, as noted, was the Hassett study. As CEA notes, this is a study that tracks many countries over many years, and such studies are always sensitive to how the analysis is specified. That doesn’t mean they’re wrong, but it does mean you have to check as many of the model’s assumptions you can to ensure that your findings are robust. When Gravelle et al do so, they quickly find the wage effect to disappear:

In every case, the coefficient estimates are close to zero and are not statistically significant at conventional confidence levels. In using annual data, we can find no evidence that changes in the top corporate tax rate affects wage rates in manufacturing.

This is also why you want to heavily discount CEA’s Figure 1, which compares wage growth across very different countries with no controls (I’m not moved by Latvia’s faster wage growth and lower corporate rate). CBPPs Huang and DeBot go through these issues in readable detail here.

Other problems with the CEA report:

–The analysis assumes average impacts are similar to median ones. This is a very big deal, because, as I argue here, even if the trickle-down chain they tout is operative (and the empirical data suggests it is not), there’s still a big slip twixt cup and lip in the last step: the idea that faster productivity growth lifts median, vs. average, compensation. I wish it were so, but as per the figure below, it is not. Essentially, CEA assumes away wage inequality.


–To CEA’s credit, though they argue that the proposal, including the shift to a territorial system that exempts foreign earnings by US companies from US taxation, reduces profit shifting (booking profits in places with lower rates), they don’t directly add that effect to wages.

–They do, however, suggest this effect would be “additive” to workers’ incomes. This suggests that CEA is conflating tax avoidance with actual job and wage creating economic activity, as Howard Gleckman points out here.

–This one’s important too: CEA ignores the “excess profits” problem. That is, while economists argue about who benefits from a reduction in the corporate tax, we agree that it purely benefits firms with profits beyond normal returns on investment. So, for big firms that dominate in their industries–Apple, Alphabet/Google, Amazon, etc.–the corporate cut clearly boosts profits far more than wages.

–CEA is clear that their analysis only covers the corporate part of the tax change, and that’s reasonable. Except for when we’re talking about distributional results, we must consider the impact of the tax cuts as we understand them in their entirety. Otherwise, we risk overlooking aspects that hurt middle and low-income households. We at CBPP have stressed these impacts, particularly the losses at the low end if the tax cuts are eventually paid for by spending cuts (see figure below).

Gussy it up any way you want, this is just the latest example of non-credible, trickle-down fairy dust. Corporate tax cuts will merely boost the profits of a sector that’s already highly profitable at the expense of the working class. Given its trillions in retained earnings and low capital costs, the corporate sector could already raise investments and worker pay if it wanted to do so.

Thanks again, Donald and co.

Trump’s two-step: Health care and fiscal sabotage

October 13th, 2017 at 12:02 pm

I wanted to bang out a quick note tying a few points together regarding health care and tax policy.

When President Trump said yesterday that his new health care executive order directing agencies to allow people to buy health coverage that doesn’t have to meet ACA standards “will be costless to the government,” he was surely wrong. This is especially the case when you add in his decision to stop paying cost-sharing reductions (CSRs), or subsidies to insurers to lower the costs of coverage to low-income policy holders.

This may seem counterintuitive. If insurers can offer lower-standard (i.e., cheaper) coverage, and if the government can cease paying a subsidy that was to amount to $9 billion next year, why would the government face higher costs?

Because as long as the ACA’s premium subsidies remain in place (income-based subsidies that offset the cost of coverage in the nongroup market), destabilizing insurance markets by raising insurers costs (ending CSRs) and invoking adverse selection (the new EO) will lead to more, not less, government spending on health care. I’ll unpack that in a second, but this is a consistent tactic in Republican slash-and-burn health-care policies: the ignoring of risk-pooling as a cost control.

As CBO recently noted, participating insurers are “still required to bear the costs of CSRs even without payments from the government.” So, premiums for the benchmark “silver” plan would quickly rise, they estimate, by 20 percent. “When premiums for silver plans increased under the policy, tax credit amounts per person for purchasing insurance in the nongroup market would increase because the credits are directly linked to those premiums.” This dynamic would add, they estimate, $200 billion to the deficit over a decade.

To the extent that the EO allows healthier people to enroll in plans that don’t comply with ACA standards, this too leads to higher premiums for the less healthy population now left behind in the diluted risk pool. If that’s the case, their premium subsidies would have to rise as well.

Now, consider these changes in tandem with Trump and the Republicans’ plan to add maybe $2 trillion to the deficit through their big, wasteful, regressive tax cut.

In other words, while they’re busy simultaneously sabotaging health care markets with one hand, they’re cutting off the future resources that will be invoked by that sabotage with the other hand.

It could be a diabolical scheme; it could be just ignorance. Most likely, it’s just a manifestation of the basic mandate from their wealthy donors to cut taxes and shrink government. But it’s very clear what it isn’t: representative governance that meets people’s needs in a fiscally responsible manner.

Tax versus fax

October 13th, 2017 at 8:19 am

Of course, we must inject factual analysis into a tax debate that is dominated by fantasies about how tax cuts pay for themselves as their benefits trickle down from zillionaires to the middle class. But the salesforce behind these cuts have not been moved one iota by these facts, and I thus conclude it will take more than that to reveal their scam on the working class. Over at WaPo.