Take a Walk on the Supply Side…Actually, Don’t

January 8th, 2014 at 1:50 pm

While you were ensconced in the covers against the polar vortex last night, I was debating my old friends Larry Kudlow and Art Laffer on Larry’s show (though this is just a partial clip for some reason) on extending UI benefits—the extension surprisingly caught a bit of a buzz yesterday as the Senate got the three-fifths needed to at least keep discussing the issue (democracy at work!).

We really are old friends, but boy, are they wrong on this one.  They’re both stuck in the fantasy supply-side world wherein jobs are there for the taking, if only the alternative of UI benefits were removed from the picture.  I pointed out the highly elevated share of long-term unemployment—the fact that at 2.6% of the labor force it’s twice what it has been in the past when Congress allowed extended benefits to expire; and the 3/1 unemployed per job opening ratio.  But to no avail—stop bothering us with your facts, man!

So why am I bothering you with this silliness?  Mainly because I said I would.  That is, like the moth to the flame, Art and Larry are pulled to…wait for it…lowering the corporate tax rate, the solution for all what ails ya!  Art claimed it would be a huge job booster, and I claimed that you certainly don’t see such correlations in the data nor in the research on the economic impact of corporate tax changes.  And I said I’d put up a graph to that effect.

So, here’s a scatterchart of the effective marginal corporate tax rate—the tax on the marginal cost of capital in the corporate sector—against employment growth (h/t to Tom Hungerford of EPI for the tax data which are from CRS tax analyst Jane Gravelle; you can do this with the top statutory corporate rate do but it doesn’t help their case at all—plus, few corps pay that rate).

EMPLOYMENT GROWTH AND EFFECTIVE MARGINAL CORPORATE TAX RATES

Annual Employment Growth and Corp Tax Rates, 1955-2006

emtr-jobs

Source: BLS and Gravelle.

Sorry the graph isn’t pretty, but I’m not going to waste time on this one.  But that’s a random smutch, as we say in the biz.  Regress employment growth on the tax rate (or change in the tax rate) and you get an insignificant coefficient that explains less than 3% of the variance of job growth.  Lags do not help.

I will, since I have the data sitting here in my statistical software, throw employment growth, the tax rate, real GDP growth (to control for the cycle), and the corporate bond rate (Moody’s Baa) into a vector autoregression (a correlation exercise that allows you to test movements in one variable when you tweak another variable, controlling for other stuff).

When you shock the tax variable by one positive standard deviation, you actually get more job growth for a year or so, but the impact fades quickly into insignificance quickly.  I don’t really believe this and don’t claim that this is much of a model.  However, when the correlations are not there at first blush, you’re not likely to find them without torturing the data.  Moreover, more careful research, like that of Hungerford, finds a similar lack of effects on GDP growth.

THE IMPACT ON EMPLOYMENT OF HIGHER CORP TAX

emtr2

The problem with the corporate tax system is that it’s riddled with loopholes and different industries face wildly different effective rates, the result more of the skill of their lobbyists than any rational strategy.  I’d be more than happy for tax policy to deal with that.  But first, since a) that’s not happening anytime soon and b) it’s not going to help much, if at all, with job growth, can we quickly reinstate UI benefits for the more than one million long-term unemployed who just lost a key lifeline?

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14 comments in reply to "Take a Walk on the Supply Side…Actually, Don’t"

  1. doverby says:

    Hey Jared, I have a question on the first graph. It’s probably a silly question, but where does each of those individual data points come from? Does each point represent a corporate tax code change against the EMP growth for that period of time? Also, how far back in time does the data go? Okay, maybe that’s like 3 questions. On a side note, I wish more economists used vector autoregressions to look at specific policy changes, especially over a longer period of time. It’s definitely one of the best ways to cancel out the noise of other changes.


    • Jared Bernstein says:

      Good question–I rushed through this and didn’t bother with careful labels. Each dot is the intersection of employment growth and the corp tax rate for that year, with data running from 1955-2006.


  2. Pierre says:

    Supply-side economics has many serious limitations. Granted, if there isn’t a “lower” tax rate to generate investment income, there can’t be much supply available. But conversely, there can’t be much demand for that supply if there’s no employment and wages to generate discretionary income. Is this too simplistic?…


  3. Melva Florance says:

    I was trapped yesterday by the “escaped” portion of the polar vortex that ventured it’s way down the Ohio River Valley and as it happened was watching the news with my cousin. This topic popped up and we got into a heated debate about the impending end to the UI Benefits extension.

    Her position: “They” (the government) have been talking about ending the extension for quite some time so I don’t know why people are so upset – as if they are caught of guard. They (the people losing their benefits) have had ample time to make other arrangements…
    My cousin is a mother of two living in a blended household with her mother. To save money after she was laid off from her job, in a call center, in Tampa, FL they moved back to Ohio. She holds a Bachelor’s Degree in Business Administration, couldn’t find a job in her field in Tampa, FL or Ohio and currently works in a 30-35 hour/week job in the child care field that has no potential for growth, benefits, or job security.

    My position: The conditions that required the unemployment benefits extension have not been alleviated.

    I am from North Carolina, one of several states experiencing negative job growth and currently attending school in Ohio another state that is experiencing negative job growth. I chose to go back to school in June 2013 to increase my career prospects in the job market and currently a student worker being paid out of Federal Work Study funds – with no other income, this means I am living well below the federal poverty level.

    It is surprising to me that given her current situation, my cousin would not be more understanding of why the debate needs to happen (extending the unemployment benefits), but more than having the conversation, people need action. My cousin, much like the folks you were talking to was completely uninterested in the numbers that drive the facts. Her opinion is based in the belief that if people will just try to do better they will do better. It is frustrating for me to talk to people who think like this. I have seen and experienced poverty as a child and as an adult and it has nothing to do with not trying or not wanting to do better. Presenting the facts in a conversation is considered “doom and gloom” talk. However only looking on the bright side of things ignores the obvious and very important reality. More than 50 million Americans are living below the poverty level, and I am thinking maybe that is the problem. If we all just dropped dead would that cause a stir. Probably not, nobody, not even our own family would care or understand. That is why we keep going because nobody would care if we didn’t.


  4. smith says:

    If you are mentioning corporate tax rates, you might (or have already)
    a) Also mention how lowering corporate rates adds a lot to inequality. Most corporate stock is owned by rich people, and even more stock by very rich people. But capital gains and qualified dividends are taxed at lower rates than income tax rates (meaning money from selling stocks and money received yearly from corporations as a share of profits). Raising corporate rates lowers inequality by indirectly taxing the very rich. That’s also why it’s hard to do, the rich know this, but Republicans tell a different story (job creators)
    b) Corporations are sitting on record amounts of cash (because no demand), which is greatly impeding recovery. Taxing profits either allows the government to spend with additional revenue without adding debt or taxing the middle class, who are not sitting on cash. Taxing profits also encourages businesses to hire more people, either they lose 1/4 to 1/3 of profits to taxes or they expand with marginally profitable new hires. Higher taxes tilts the equation to favor expansion, which tends to create demand.
    c) The record amounts of case is also a too obvious argument against lowering rates.

    We should be raising not lowering corporate taxes, close loopholes and raise rates, raise corporate rates and capital gains, and marginal rates. Revenue neutral corporate taxes reform is a stupi…, excuse me, silly game for Democrats to play. But rich Democratic and Republican leaders who run the party are all the same. (Our out of touch presidents earn $400,000/year and congress gets $172,000/year)


  5. Larry Smith says:

    Couldn’t resist the Art Laffer challenge last night to show data refuting his claim that lowering Corp Taxes lowers Unemployment. My non economist simple look at Fred data shows just the opposite. In fact a graph of the data since 1978 shows an inverse correlation between Corp Tax (as % share of US Rev) and Unemployment rate: http://twitpic.com/drka33


  6. SeattleAlex says:

    I don’t know how you make it through these segments without tearing your hair out brother…they probably cut your screen time short because you were just talking too much damn sense.


  7. pgl says:

    Did you see Larry Kotlikoff’s NYTimes oped endorsing the elimination of the corporate profits tax? Like the other Larry and Mr. Laffer – he claims it would be real jobs booster. Fortunately, the Tax Justice Network and Citizens for Tax Justice have ably replied. My two cents on Kotlikoff’s Apple example can be found here:

    http://econospeak.blogspot.com/2014/01/does-laurence-kotlikoff-understand.html


  8. Larry Signor says:

    “Trickle down”, a euphemism for middle class wage growth over the past 40 years. Supply side works well for corporate America. They control everything including the effective tax rate via production variations. Producing the last marginally profitable product is seldom the goal. For more on corporate power in a slightly under-performing economy see Paul Krugman: http://krugman.blogs.nytimes.com/2013/12/25/why-corporations-might-not-mind-moderate-depression/?_r=0


  9. Bud Meyers says:

    Let’s just say for the sake of argument that there are only 11 million Americans out of work — only 1/3 get UI benefits, so what’s the “disincentive” for the other 2/3 for not finding a job?

    The White House recently reported that almost 23.9 million long-term unemployed Americans were out of work at least 6 months and received extended unemployment benefits over the past 5 years. How many had their benefits expire without ever finding another job?

    http://bud-meyers.blogspot.com/2013/12/once-benefits-end-so-do-chances-of.html


  10. John says:

    Their argument:

    1. Lower corporate tax rates.
    2. …
    3. Increased employment!

    If the argument is simply supply-side — let them keep more money, they’ll spend more on employees, that argument is patently false. The rates are completely irrelevant to the amount of money available to hire persons, because that amount isn’t taxed. (The jargon is that the money is deducted.)


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