Check it out, OTE’ers: The Reconnection Agenda is upon us!

April 24th, 2015 at 11:46 am

Read the intro to my new book, The Reconnection Agenda: Reuniting Growth and Prosperity, over at the WaPo PostEverything.

Or better yet, download the whole damn book at let me know what you think. You can buy a hard copy–you know, with paper pages, here.

[Here’s the cover, which I think is great, by Anthony Martinez and Kate Bernstein (the latter of whom is all of 13!). It takes a village to make this happen and special shout outs to Ben Spielberg and Stephanie Landry]


FTT redux

April 23rd, 2015 at 9:22 am

Good comments/questions on this post from yesterday, so let me briefly revisit the idea of a financial transaction tax: a small, few basis points tax on the buying and selling of securities.

–Mike points out that “spoofers” place and cancel buy and sell orders, they don’t execute sales, so an FTT wouldn’t stop them. Sloppy writing on my part. My (unstated) thought, as Mitakeet points out, was that to stop spoofing, the FTT would have to apply to orders.

–Leander asks: won’t traders just take their accounts to untaxed exchanges elsewhere? Over to Dean B:

MYTH: Financial transactions are so mobile that an FTT in one country is unenforceable and will simply result in trading moving overseas.

FACT: The European Union recently voted to implement the FTT in at least 11 member nations, which likely will go into effect in 2014.* With so many European, as well as several Asian, trading floors soon to be or already operating with the tax, there’s little chance that trading will move overseas as a result of passing it in the U.S. In addition, the U.K. has had a tax on stock trades for centuries, throughout periods when the U.K.’s volume of trading has grown robustly. It raises over 3 billion pounds per year, which would be the equivalent of over $30 billion in an economy the size of the U.S.

*delayed until 2016, so not clear where this ultimately lands. It would be better to jump together on an FTT, but as Dean suggests, a small enough tax may not generate much movement. There are risks and costs to trading on unfamiliar exchanges, including fees that work the same way as the FTT would.

–Chuck points out that there are a lot of corporations that are engaged in aggressive tax avoidance. If we want revenues, why not go after them?

Agree! I like to make the point that for every $1 we provide to IRS enforcement, they can collect $6 owed (I’m conflating tax avoidance and tax evasion here a bit…see the link Chuck provided; the avoidance stuff is legal…ugh). But the FTT has the added, Pigouvian benefits noted in the piece.

–Pete says regulate, don’t tax. My point in the piece was that the tax is a cleaner, more reliable way to go after HFT. The quant jocks live to workaround regulations. As for Pete’s hand-wringing about the incidence of the tax, remember, we’re talking a few basis points! I’d settle for a very small FTT–<5 bps–which for your average trader is not nearly the big deal Pete says it is.

Let’s keep this conversation going…the more I think about this, the more I wonder if its time has come!

A financial transaction tax is a Pigouvian tax!

April 22nd, 2015 at 10:22 am

This morning’s NYT tells of prosecutors finally catching up with the alleged perp behind the “flash crash” in 2010, when the Dow fell almost 600 points in a few minutes. It bounced back soon after, but not until everyone’s nerves were seriously jangled and confidence in the soundness of the equity markets took a big hit.

US prosecutors allege that the crash was the work of a guy in a London row house a few miles from Heathrow. That’s right, some schlub in his bathrobe supposedly tanked the markets by “spoofing:” algorithmic trading that executes tens of thousands of buy and sell orders only to cancel them milliseconds later. Once the market reacts to the spoofer’s large bets for or against the stock, she moves in and cashes in on the price change. Basically, a high-frequency variation of “pump-and-dump.”

As the Times notes:

The case also played into worries that have swirled around the increasingly automated and complex financial markets, where regulators have struggled to keep up with nimble new participants like high­-frequency trading firms that use sophisticated networks to make money in milliseconds using rapid-fire trades.

Regulators have various ideas of how to regulate against spoofing, front-running (where flash traders get information on trades milliseconds before the public), and other such high-frequency fun and games; I’ve written about them before. They generally work by creating speed bumps in the trading process, say by moving from continuous trading to “batch trading,” thereby taking away the millisecond advantages of the flashers.

That might work, but it might not. You ask me, an arms race against quants who live to write regulation-beating algorithms is a recipe for more of the same. For example, suppose batch trades across different exchanges are not perfectly synchronized. That’s an opportunity for high-frequency arbitrage.

A better, simpler way—and one with numerous positive externalities—is a financial transaction tax, a small excise tax on the security trades, typically a few basis points (hundredths of a percent) on the value of the trade. A three basis points FTT is scored as raising over $300 billion over 10 years, a score that includes its dampening impact on trades.

Of course, that last bit is a feature, not a bug. We’d have to try it to find out, but it is widely believed that an FTT, even one of the tiny magnitude just noted, would wipe out most high-frequency trading. Though the flash boys can generate huge payouts, the volume of trades they must execute to do so quickly becomes too costly once they’re taxed.

In that regard, the FTT is a Pigouvian tax: a tax that offsets the significant, external costs imposed on the larger society by activities like smoking or polluting. And it does so while generating much needed revenue.

There are, of course, arguments against the FTT—by reducing trading, it dampens liquidity; it pushes traders to other exchanges to escape the tax. I deal with some of these concerns here, as does Dean Baker here. I take these concerns seriously, but my strongly held belief is that the likely benefits outweigh potential costs.

Perhaps the most valid concern in the Pigouvian context is that an FTT would fall on everyone, not just the flash mob. However, that’s not unique to the FTT. It takes me about two years to go through a bottle of whiskey, but I still have to pay the “sin” tax. It’s the heavy drinkers who bear the brunt of the tax, as would the high-speed traders in the case of the FTT.

So instead of a technical workaround that the quant jocks could probably beat before the regulators had their shoes on, the smart move here is to introduce a small FTT. I’d love to see this idea surface in the forthcoming campaign…any takers???

Faster productivity growth would be great. I’m just not at all sure we can count on it to lift middle-class incomes.

April 21st, 2015 at 8:21 am

Recently, a number of economists and commentators have suggested that faster productivity growth would be a big way to boost the income of middle-class households. I’m all for faster productivity growth, though I’d argue no one knows how to reliably make it happen. But given the wedge of inequality between productivity and low and middle incomes, wages, and wealth, I’m skeptical that this would work as well as some think.

So I wrote this paper exploring the issue and adding some of my own estimates. Here’s the intro:

Faster productivity growth would be great. But don’t count on it to raise middle-class incomes.

The stagnation of middle-class incomes is one of the most important and influential trends in American economics. Politicians, from President Obama to Hillary Clinton and Jeb Bush have consistently argued that loosening the middle-class squeeze is a major goal of their policies. Prominent economist Larry Summers recently wrote that in crafting “global as well as domestic” economic policy, “the middle class matters the most,” warning against approaches that offer “little to those in the middle.”

In recent weeks, largely motivated by an analysis by President Obama’s economic team, a solution to stagnant middle-income growth has been elevated: faster productivity growth. The President’s Council of Economic Advisors (CEA) tells us the following:

“What if productivity growth from 1973 to 2013 had continued at its pace from the previous 25 years? In this scenario, incomes would have been 58 percent higher in 2013. If these gains were distributed proportionately in 2013, then the median household would have had an additional $30,000 in income.”

That’s a huge increase—more than 50 percent—over the current median household income of about $52,000. Given an increase of this magnitude, it’s no surprise that the idea that higher productivity growth is an important answer to stagnant middle-class incomes has been touted by various commentators in this debate. Based on the CEA’s calculation, Tyler Cowan goes as far as to claim that faster productivity growth would not just boost middle class incomes, but would increase their economic mobility, implying they’d gain relative to other groups.

There are, however, two problems with all this cheerleading. First, there is a large and persistent gap between productivity growth and middle-class incomes: we cannot realistically assume that faster productivity growth would reach the middle as opposed to doing an end-run around them on its way to the top. Second, while it would be great to have faster productivity growth, I’m afraid we must be humble about our ability to make that happen.

In what follows, I document the inequality-induced split between median family income and productivity growth, with a focus on the point that, while productivity did slow in the mid-1970s, it still grew much faster than middle incomes. In this regard, income inequality has increasingly played a wedge-like role between middle-class income and productivity growth.

This observation on the role of inequality in the income/productivity split is key to my argument. Productivity is really another way of looking at overall, or macroeconomic growth—it is aggregate output per hour. A central, even definitional, characteristic of increased inequality is that less growth reaches the middle class relative to the wealthy. Thus, to assign the benefits of faster productivity growth to the middle class is analogous to assuming away growing inequality, an obvious “diagnostic” mistake with the potential to distract policy makers who want to help middle-class families from the importance of policies designed to push back against rising inequality.

To be clear, faster productivity growth would be a highly welcomed development, and would surely help boost median incomes to some degree. But as long as inequality continues to play a wedge-like role between aggregate growth and the incomes of low- and middle-income households, analysts need to be much more cautious in their assumptions regarding the benefits of faster productivity to the middle class.

…read the rest of the paper; and here’s the data set I used for those who’d like to mess around with the numbers.