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February 17, 2013

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Posted: 17 Feb 2013 12:03 AM PST
Posted: 16 Feb 2013 03:53 PM PST
Joe Stiglitz:
Equal Opportunity, Our National Myth, by Joe Stiglitz, Commentary, NY Times: President Obama's second Inaugural Address used soaring language to reaffirm America's commitment to the dream of equality of opportunity...
The gap between aspiration and reality could hardly be wider. Today, the United States has less equality of opportunity than almost any other advanced industrial country. Study after study has exposed the myth that America is a land of opportunity. This is especially tragic:... there is near-universal consensus that inequality of opportunity is indefensible. ...
And:
How do we explain this? Some of it has to do with persistent discrimination. ... Of course, there are other forces at play, some of which start even before birth. Children in affluent families get more exposure to reading and less exposure to environmental hazards. Their families can afford enriching experiences like music lessons and summer camp. They get better nutrition and health care, which enhance their learning, directly and indirectly. ...
In some cases it seems as if policy has actually been designed to reduce opportunity: government support for many state schools has been steadily gutted..., especially in the last few years. Meanwhile, students are crushed by giant student loan debts that are almost impossible to discharge, even in bankruptcy. This is happening at the same time that a college education is more important than ever for getting a good job. ...
And increasingly even a college degree isn't enough; one needs either a graduate degree or a series of (often unpaid) internships. Those at the top have the connections and social capital to get those opportunities. Those in the middle and bottom don't. The point is that no one makes it on his or her own. And those at the top get more help from their families than do those lower down on the ladder. Government should help to level the playing field.
Americans are coming to realize that their cherished narrative of social and economic mobility is a myth. ... Without substantial policy changes, our self-image, and the image we project to the world, will diminish...
Posted: 16 Feb 2013 02:00 PM PST
Do the wealthy move away when taxes are increased?:
The Myth of the Rich Who Flee From Taxes, by Mikhail Klimentyev, NYT: ... It's an article of faith among low-tax advocates that income tax increases aimed at the rich simply drive them away..., and on its face, it seems to make sense. But it's not the case. It turns out that a large majority of people move for far more compelling reasons, like jobs, the cost of housing, family ties or a warmer climate. At least three recent academic studies have demonstrated that the number of people who move for tax reasons is negligible, even among the wealthy. ...
Of course, some people do move for tax reasons, especially wealthy retirees, athletes and other celebrities without strong ties to high-tax locations, like jobs and families. ... But there aren't many people like that. "Tax-induced flight is rare," Professor Tannenwald said. ...
Yet the tax flight myth remains surprisingly persistent, fanned by media coverage of celebrities, who are among those most likely to have the means and motive to choose a home based on tax considerations. "You can always find an anecdote." Mr. Shure said. "Many people want this to be true as a way to discourage tax increases. ..."
Another zombie.
Posted: 16 Feb 2013 12:05 PM PST
What is the basis for progressive taxation? One principle of taxation (there are others) is "equal marginal sacrifice," i.e. that the last dollar in taxes paid by the rich and the poor should cause the same amount of pain. This is from Miles Corak:
... Alfred Marshall in his Principles of Economics, the most used economics textbook from the 1890s to the 1920s, not just in Cambridge England where he taught, but in the whole English-speaking world, wrote that:
A rich man in doubt whether to spend a shilling on a single cigar, is weighing against one another smaller pleasures than a poor man, who is doubting whether to spend a shilling on a supply of tobacco that will last him for a month. The clerk with £100 a-year will walk to business in a much heavier rain than the clerk with £300 a-year; for the cost of a ride by tram or omnibus measures a greater benefit to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The benefit that is measured in the poorer man's mind by the cost is greater than that measured by it in the richer man's mind.
In other words, losing a dollar when you already have many causes less pain than when you have only a few. Marshall's argument is the basis for both the substance and the method of a good deal of basic micro-economics: it explains the "law of demand"—why lower prices induce people to buy more—but also why tax rates should rise with income.
Economists judge the functioning of the tax system in a number of ways: certainly the system should not be administratively cumbersome, and it should, to the greatest degree possible, not cause individuals in a well-functioning market to change their behavior. It should also treat equals equally. Finally, the tax system should raise more revenue where it will cause the least pain. And this last concern, when coupled with Marshall's reasoning, suggests that tax rates should be progressive: as income increases, the greater the fraction that should be paid in taxes. ...
Posted: 16 Feb 2013 10:50 AM PST
Kevin Drum has a question:
Has the Mainstream Media Finally Had Enough?, by Kevin Drum: I'm curious. It seems to me that something has happened over the past three months: the nonpartisan media has finally started to internalize the idea that the modern Republican Party has gone off the rails. Their leaders can't control their backbenchers. They throw pointless temper tantrums about everything President Obama proposes. They have no serious ideas of their own aside from wanting to keep taxes low on the rich. They're serially obsessed with a few hobby horses — Fast & Furious! Obamacare! Benghazi! — that no one else cares about. Their fundraising is controlled by scam artists. They're rudderless and consumed with infighting. They're demographically doomed. ...
The framing of even straight new reports feels just a little bit jaded, as if veteran reporters just can't bring themselves to pretend one more time that climate change is a hoax, Benghazi is a scandal, and federal spending is spiraling out of control. It's getting harder and harder to pretend that the same old shrieking over the same old issues is really newsworthy.
Question: Am I just imagining this? Or has there really been a small but noticeable shift in the tone of recent reporting?
Paul Krugman says:
On both sides of the Atlantic, the austerians seem to be freaking out. And that has to be good news, an indication that they realize, at some level, that they're losing the debate. ... Unfortunately, these people have already done immense damage, and still retain the power to do a lot more.
The last sentence is my answer to Kevin Drum's question. Even if there is a lull, I expect it to be temporary and I wonder if they've learned anything along the way.

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Posted: 16 Feb 2013 12:03 AM PST
Posted: 15 Feb 2013 12:04 PM PST
Tim Duy:
Another Entry on The Currency Wars, by Tim Duy: Regarding the never-ending debate on the the currency wars, Greg Ip adds an important point:
..these conventional and unconventional actions work the same way: by lowering the real (inflation-adjusted) interest rate, they stimulate domestic demand and consumption...This pushes the exchange rate down in two ways. First, a lower interest rate reduces a currency's relative expected return...Second, higher inflation reduces a currency's real value and thus ought to lead to depreciation. But higher inflation also erodes the competitive benefit of the lower exchange rate, offsetting any positive impact on trade.
If this were the end of the story, the currency warriors would have a point. But it isn't. The whole point of lowering real interest rates is to stimulate consumption and investment which ordinarily leads to higher, not lower, imports. If this is done in conjunction with looser fiscal policy (as is now the case in Japan), the boost to imports is even stronger. Thus, QE's impact on its trading partners may be positive or negative..The point is that this is not a zero sum game; QE raises a country's GDP by more than any improvement in the trade balance.
The Federal Reserve is generally considered the first offender in the currency wars, yet it is often forgotten that the vast majority of the Dollar's real depreciation occurred prior to the recession:
Realdollar
To be sure the Dollar took a hit after the first round of quantitative easing, but that was a positive policy outcome for all as the calming of financial markets eased the rush to the safety of the US currency. On average, since the beginning of 2008 there has been little change in the real value of the Dollar, despite the massive expansion of the Fed's balance sheet.
Also note that by stabilizing the US (and global economies), the Fed contributed to a stabilization of the US current account balance:
Current
All of the improvement in the current account balance occurred prior to the Fed's expansion of the balance sheet, largely due to collapsing global trade. And the subsequent period was one of generally declining real government spending; a more stimulative policy would likely have supported more imports such that trade remained an even greater drag on the economy.
In short, the Federal Reserve did not pursue a "beggar-thy-neighbor" policy. The Federal Reserve actually stabilized the Dollar's value, calmed global financial markets, made a positive contribution to international trade, and stabilized the US current account balance. Sounds like a net win across the board.
Separately, I see that Japanese policymakers continue to make the same mistake of needlessly antagonizing their trading partners. From Bloomberg:
The yen fell after Kazumasa Iwata, a potential candidate to become the next central bank head, signaled the currency has scope to depreciate further and data showed Japan's gross domestic unexpectedly shrank...Iwata, a former deputy governor at the BOJ, said in a statement the price goal can't be reached without a correction in the yen's strength. The yen at 90 to 100 per dollar marks a return to equilibrium, he said.
While there are voices in Japan arguing that the Yen's depreciation is simply a side-effect of domestic policies, it is tough for other nations to buy that story when prominent current, former and potentially future policymakers repeatedly put numbers on the appropriate value of the Yen. They would be better off with some noncommittal statement about currency values being driven by economic fundamentals, with only one spokesperson for the currency. Trying to convince Japanese policymakers to not talk about the value of the Yen, however, is generally about as productive as trying to convince the sky not to be blue.
Posted: 15 Feb 2013 08:40 AM PST
I have some comments on the minimum wage at MoneyWatch:
Does raising the minimum wage really help workers?
One of the questions I address is whether it would be better to increase the EITC instead of increasing the minimum wage.

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Posted: 15 Feb 2013 12:24 AM PST
Marco Rubio is spouting revisionist, fallacious, scary, zombie-type ideas:
Rubio and the Zombies, by paul Krugman, Commentary, NY Times: The State of the Union address was not, I'm sorry to say, very interesting. ... On the other hand, the G.O.P. reply, delivered by Senator Marco Rubio of Florida, was both interesting and revelatory. ... Mr. Rubio is a rising star... What we learned Tuesday, however, was that zombie economic ideas have eaten his brain. ...
Start with the big question: How did we get into the mess we're in?
The financial crisis of 2008 and its painful aftermath ... were a huge slap in the face for free-market fundamentalists. ... Instead of learning from this experience, however, many on the right have chosen to rewrite history. ... Every piece of this revisionist history has been refuted in detail. No, the government didn't force banks to lend to Those People...; no, government-sponsored lenders weren't responsible for the surge in risky mortgages...
But the zombie keeps shambling on — and here's Mr. Rubio Tuesday night: "...In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies." Yep, it's the full zombie.
What about responding to the crisis? Four years ago, right-wing economic analysts insisted that deficit spending would destroy jobs ...and ... send interest rates soaring. The right thing, they claimed, was to balance the budget, even in a depressed economy.
Now, this argument was obviously fallacious... Sure enough, interest rates, far from soaring, are at historic lows — and countries that slashed spending have also seen sharp job losses. You rarely get this clear a test of competing economic ideas, and the right's ideas failed.
But the zombie still shambles on. And here's Mr. Rubio: "Every dollar our government borrows is money that isn't being invested to create jobs. And the uncertainty created by the debt is one reason why many businesses aren't hiring." Zombies 2, Reality 0.
In fairness to Mr. Rubio, what he's saying isn't any different from what everyone else in his party is saying. But that, of course, is what's so scary.
For ... one of our two great political parties has seen its economic doctrine crash and burn twice: first in the run-up to crisis, then again in the aftermath. Yet that party has learned nothing; it apparently believes that all will be well if it just keeps repeating the old slogans, but louder.
It's a disturbing picture, and one that bodes ill for our nation's future.
Posted: 15 Feb 2013 12:03 AM PST
Posted: 14 Feb 2013 04:31 PM PST
At first I thought wow, even the NRO has a sensible position on the balanced budget amendment -- it is opposed. But in the end it's mostly the same old stuff, the fear that it might interfere with tax cuts, spending cuts, etc:

Against a BBA, Again, by The Editors: Senate Republicans are again set to mount a fight for a balanced-budget amendment (BBA). ... The amendment would cap federal spending at 18 percent of GDP and require supermajorities for tax hikes and new borrowing.
First question. When income is growing and doubles every 30 years or so, as it does, wouldn't we want to spend more on social insurance? Who said 18 percent is the right amount at any time, let alone always and forever? Anyway, moving on:
Passage of a BBA is not just implausible; it also ... enshrines partisan policy priorities in the founding document of the republic, which was meant to structure the democratic process, not rig its outcome in advance.
I can agree with that, no reason to enshrine Republican dogma in the constitution, especially when it's this harmful. And I can agree with this too, the courts shouldn't be involved in setting fiscal policy:
It would invite a hyperactive judicial intervention in the budget-making process that would throw the separation of powers completely out of balance. ... This means the judiciary might well attempt to set specific levels for every category of spending or otherwise shape budget priorities in an effort to enforce the Constitution. Such a perversion of republican government would raise the stakes of inter-branch hostility and distrust to unprecedented levels.
And Congress would have strong incentives to evade the spirit of such a law. If you think the official scoring of budget proposals is torturously politicized now, wait until constitutionality is at stake. Be prepared for a radical reimagining of just what phrases such as "gross domestic product" and "taxes" mean. And though the amendment includes provisions for exception — waiving spending limits in the case of a declared war, for instance — they are all but certain to prove unequal to reality and subject to abuse (think wars of fiscal choice).
Yes, I can think of a Party that says it doesn't believe in fiscal (Keynesian) policy, but every time there's a recession that same Party argues that we need to cut taxes to cure it. A balanced budget amendment might interfere with this game of lowering taxes to fight recessions, refusing to ever allow them to go up again, and then using the resulting deficit to claim spending is out of control.
But now we get to the real reason for the opposition, it might make it harder to reduce spending and cut taxes:
Moreover, the amendment's very strictness in pushing for conservative priorities in 2013 could make it harder to realize conservative priorities in the future. Tax rates are lower today than they were in 1980, but could Reagan have slashed Carter-era rates under a constitutional regime that demanded such tight coordination between revenue and spending and erected massive hurdles to their decoupling?
There is no constitutional shortcut to the arduous task of reining in spending. ...
And there is also no constitutional shortcut to "the arduous task" raising taxes to support the programs we want to have either. Glad the editors at the NRO are against the amendment, even if it is for a lot of wrong reasons.
Posted: 14 Feb 2013 02:20 PM PST
Not sure why this made me chuckle, but it did:
Trolls win: Rude blog comments dim the allure of science online, EurekAlert: The trolls are winning. Pick a story about some aspect of science, any story, scroll down to the blog comments and let the bashing begin:
  • Wonder how much taxpayer cash went into this 'deep' study?
  • I think you can take all these studies by pointy headed scientists, 99 percent of whom are socialists and communists, and stick them where the sun don't shine.
  • Yawn. Climate change myth wackos at it again.
  • This article is 100 percent propaganda crapola.
  • Speaking of dolts, if you were around in the 70s, when they also had scientists, the big talk then was about the coming ice age. And don't give me any of that carbon emission bull@!$%#.
Such nasty back and forth, like it or not, is now a staple of our news diet, and in the realm of online science news, the diatribes, screeds and rants are taking a toll on the public perception of science and technology, according to a study by researchers at the University of Wisconsin-Madison. ...
UW-Madison science communication researcher Dominique Brossard reported the results of a study showing the tone of blog comments alone can influence the perception of risk posed by nanotechnology, the science of manipulating materials at the smallest scales. ...
While the tone of blog comments can have an impact, simple disagreement in posts can also sway perception: "Overt disagreement adds another layer. It influences the conversation," she explains.
UW-Madison Life Sciences Communication Professor Dietram Scheufele, another of the study's co-authors, notes that the Web is a primary destination for people looking for detailed information and discussion on aspects of science and technology. Because of that trend, "studies of online media are becoming increasingly important, but understanding the online information environment is particularly important for issues of science and technology."
Posted: 14 Feb 2013 11:14 AM PST
Doglas Holtz-Eakin has learned nothing from his own failed predictions, nothing from the failed predictions of his cronies, and nothing from the experience in Europe (which makes the appearance of this op-ed in British rather than a US newspaper all the more odd):
We have to get US government spending under control, by Douglas Holtz-Eakin, Commentary, guardian.co.uk: ...Spend more, perhaps much more. Could this really be the best for America? As incredible as it may sound, this has become the new pundit orthodoxy. Confronted with over $16tn in federal debt, a half-decade of roughly $1tn annual deficits, and a Congressional Budget Office projection of $7tn in deficits over the next 10 years, their advice ranges from stand pat to (as Dean Baker argued for the Guardian last week) "double down".
The sad truth is that while the debt is as plain as day, there's still a long way to go in convincing some people of the problem. I'm happy to give it a shot.
The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth...
Waiting to fix the debt is risky. ... The bad news scenario involves a financial crisis and severe recession. After the suffering, the US would face – you guessed it – an even worse debt problem than it had originally. ...
Debt reduction produces jobs and better economic growth.
Again, reading that last line, he has learned nothing from the failure of the confidence fairy to appear. Waiting ot fix the debt -- a problem driven mainly by health care cost escalation that won't become severe for many years -- is not risky, but his advice certainly is. Continuing:
The orthodoxists will trot out the usual fears of austerity and the need to spend to prop up the economy. Just remember that the intellectual foundation for this view is rooted firmly in an alternate universe. We listened to this advice in the 1960s and 1970s, and the political class translated it into chronically high unemployment and chronically high inflation. Economists learned nothing and continue to peddle the same backboard-based remedies.
Down with the orthodoxy. It is time to get the deficit under control.
The notion that we are responding in the same way as in the 60s and 70s, and that we faced the same type of shock (that require the same types of policies) -- an oil price shock and other large supply-side disturbances from demography that we faced then -- is wrong and he ought to know that (added note: plus, it was monetary, not fiscal policy that was the main problem back then).
The headline today for Europe -- where countries have followed the advice of the Holtz-Eakin types, is (remember his claim above about austerity and growth?):
Eurozone economy falls short of forecasts, FT: Europe's brittle economies shrank at their fastest rate since the collapse of Lehman Brothers four years ago, official data for the fourth quarter of 2012 showed on Thursday, with both strong and weak countries falling short of expectations....
The "pundit orthodoxy" his disses is from Paul Krugman. Kind of funny, given how wrong Holtz-Eakin has been relative to Krugman (and Dean Baker too), but Krugman can speak for himself, and has, on how wrong the "we're about to become Greece!!!" crowd has been. There is, however, one thing he is correct about. Holtz-Eakin is right to say we shouldn't listen to some pundits, especially those like himself who have been so wrong about how events would unfold at every step along the way.
Posted: 14 Feb 2013 10:12 AM PST
Here is a rebuttal to something I posted not too long ago on potential harm from banning plastic bags (via Tim Taylor):
San Francisco plastic-bag ban associated with 46% increase in foodborne-illness deaths — Not!
The post at The Berkeley Blog is not very informative -- I'd recommend clicking through to the actual response:
My full memo is here: SF-Health-Officer-MEMO-re-Reusable-Bag-Study_V8-FIN
The Klick study I read is here: SSRN-id2196481

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Posted: 14 Feb 2013 12:03 AM PST
Posted: 13 Feb 2013 02:26 PM PST
I need to read this paper:
Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market, by Tomasz Piskorski, Amit Seru, and James Witkin: Abstract: We contend that buyers received false information about the true quality of assets in contractual disclosures by intermediaries during the sale of mortgages in the $2 trillion non-agency market. We construct two measures of misrepresentation of asset quality -- misreported occupancy status of borrower and misreported second liens -- by comparing the characteristics of mortgages disclosed to the investors at the time of sale with actual characteristics of these loans at that time that are available in a dataset matched by a credit bureau. About one out of every ten loans has one of these misrepresentations. These misrepresentations are not likely to be an artifact of matching error between datasets that contain actual characteristics and those that are reported to investors. At least part of this misrepresentation likely occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed, peaking in 2006. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans. Lenders seem to be partly aware of this risk, charging a higher interest rate on misrepresented loans relative to otherwise similar loans, but the interest rate markup on misrepresented loans does not fully reflect their higher default risk. Using measures of pricing used in the literature, we find no evidence that these misrepresentations were priced in the securities at their issuance. A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent seems to be unrelated to measures of incentives for top management, to quality of risk management inside these firms or to regulatory environment in a region. Misrepresentations on just two relatively easy-to-quantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries in upwards of $160 billion.
Posted: 13 Feb 2013 11:46 AM PST
How would you respond to Greg Clark?:
...Many commentators automatically assume that low intergenerational mobility rates represent a social tragedy. I do not understand this reflexive wailing and beating of breasts in response to the finding of slow mobility rates. The fact that the social competence of children is highly predictable once we know the status of their parents, grandparents and great-grandparents is not a threat to the American Way of Life and the ideals of the open society.
The children of earlier elites will not succeed because they are born with a silver spoon in their mouth, and an automatic ticket to the Ivy League. They will succeed because they have inherited the talent, energy, drive, and resilience to overcome the many obstacles they will face in life. Life is still a struggle for all who hope to have economic and social success. It is just that we can predict who will be likely to possess the necessary characteristics from their ancestry.
Quickly: I don't buy that individuals in all of these groups have an equal chance to reach their potential, whatever that might be. I do buy that the barriers that prevent an equal chance to realize potential have been present for a long, long time.
Posted: 13 Feb 2013 10:24 AM PST
Paul Krugman explains why the false charge that government housing policy caused the financial crisis and recession is harmful:
...No, the CRA wasn't responsible for the epidemic of bad lending; no, Fannie and Freddie didn't cause the housing bubble; no, the "high-risk" loans of the GSEs weren't remotely as risky as subprime.
This really isn't about the GSEs, it's about the BSEs — the Blame Someone Else crowd. Faced with overwhelming, catastrophic evidence that their faith in unregulated financial markets was wrong, they have responded by rewriting history to defend their prejudices.
This strikes me as a bigger deal than whether Rubio slurped his water; he and his party are now committed to the belief that their pre-crisis doctrine was perfect, that there are no lessons from the worst financial crisis in three generations except that we should have even less regulation. And given another shot at power, they'll test that thesis by giving the bankers a chance to do it all over again.
I've taken this myth on more times than I can remember, and the evidence against the claim that housing policy caused our problems is very clear. But the myth isn't going away. First, it's a convenient story for the Republican view that trying to help poor people is bad for them, and bad for everyone else too. Social insurance such as unemployment compensation makes them lazy, raising the minimum wage actually hurts them overall, attempts to help lower income households purchase a house crash the economy, and so on. It's all at odds with the evidence but it gives them, as Krugman notes, a shield against tax increases, regulations, and so on that are needed to deal with these problems. The second reason is just as important, there's no political cost to making these claims. One of the most prominent members of the Republican Party can give an address to the nation in response to the State of the Union that makes false claims, and nothing happens. Telling easily rebutted falsehoods brings little media response from traditional media outlets, but take a drink of water...

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Posted: 13 Feb 2013 12:03 AM PST
Posted: 12 Feb 2013 06:28 PM PST
In case you want to talk about it (full text).
Posted: 12 Feb 2013 01:35 PM PST
Remember the debate over "who built that?" in the election? I was scrounging around for information on the history of the income tax and came across this "excerpt from the Ways and Means Committee's report on the Revenue Act of 1935" that discusses this and other issues. As noted in the introduction, "The report reproduces a June 19, 1935, message from President Roosevelt to Congress advocating an inheritance tax, in addition to the estate tax. Although the inheritance tax proposal was not adopted, the message provides information on why the taxation of individuals' estates was considered appropriate." (This is an excerpt of the excerpt):
Message to Congress on Tax Revision June 19, 1935: ... Our revenue laws have operated in many ways to the unfair advantage of the few, and they have done little to prevent an unjust concentration of wealth and economic power.
With the enactment of the Income Tax Law of 1913, the Federal Government began to apply effectively the widely accepted principle that taxes should be levied in proportion to ability to pay and in proportion to the benefits received. Income was wisely chosen as the measure of benefits and of ability to pay. This was, and still is, a wholesome guide for national policy. It should be retained as the governing principle of Federal taxation. The use of other forms of taxes is often justifiable, particularly for temporary periods; but taxation according to income is the most effective instrument yet devised to obtain just contribution from those best able to bear it and to avoid placing onerous burdens upon the mass of our people.
The movement toward progressive taxation of wealth and of income has accompanied the growing diversification and interrelation of effort which marks our industrial society. Wealth in the modern world does not come merely from individual effort; it results from a combination of individual effort and of the manifold uses to which the community puts that effort. The individual does not create the product of his industry with his own hands; he utilizes the many processes and forces of mass production to meet the demands of a national and international market.
Therefore, in spite of the great importance in our national life of the efforts and ingenuity of unusual individuals, the people in the mass have inevitably helped to make large fortunes possible. Without mass cooperation great accumulations of wealth would 'be 'impossible save by unhealthy speculation. As Andrew Carnegie put it, "Where wealth accrues honorably, the people are · always silent partners." Whether it be wealth achieved through the cooperation of the entire community or riches gained by speculation—in either case the ownership of such wealth or riches represents a great public interest and a great ability to pay.
The call for inheritance and gift taxes:
I My first proposal, in line with this broad policy, has to do with inheritances and gifts. The transmission from generation to generation of vast fortunes by will, inheritance, or gift is not consistent with the ideals and sentiments of the American people.
The desire to provide security for oneself and one's family is natural and wholesome, but it is adequately served by a reasonable inheritance. Great accumulations of wealth cannot be justified on the basis of personal and family security. In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others.
Such inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our Government.
Creative enterprise is not stimulated by vast inheritances. They bless neither those who bequeath nor those who receive. As long ago as 1907, in a message to Congress, President Theodore Roosevelt urged this wise social policy:
"A heavy progressive tax upon a very large fortune is in no way such a tax upon thrift or industry as a like tax would be on a small fortune. No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood."
A tax upon inherited economic power is a tax upon static wealth, not upon that dynamic wealth which makes for the healthy diffusion of economic good.
Those who argue for the benefits secured to society by great fortunes invested in great businesses should note that such a tax does not affect the essential benefits that remain after the death of the creator of such a business. The mechanism of production that he created remains. The benefits of corporate organization remain. The advantages of pooling many investments in one enterprise remain. Governmental privileges such as patents remain. All that are gone are the initiative, energy and genius of the creator—and death has taken these away.
I recommend, therefore, that in addition to the present estate taxes, there should be levied an inheritance, succession, and legacy tax in respect to all very large amounts received by any one legatee or beneficiary; and to prevent, so far as possible, evasions of this tax, I recommend further the imposition of gift taxes suited to this end.
Because of the basis on which this proposed tax is to be levied and also because of the very sound public policy of encouraging a wider distribution of wealth, I strongly urge that the proceeds of this tax should be specifically segregated and applied, as they accrue, to the reduction of the national debt. By so doing, we shall progressively lighten the tax burden of the average taxpayer, and, incidentally, assist in our approach to a balanced budget.
A call for an increase in the income tax rate on high income households:
II The disturbing effects upon our national life that come from great inheritances of wealth and power can in the future be reduced, not only through the method I have just described, but through a definite increase in the taxes now levied upon very great individual net incomes.
To illustrate: The application of the principle of a graduated tax now stops at $1,000,000 of annual income. In other words, while the rate for a man with a $6,000 income is double the rate for one with a $4,000 income, a man having a $5,000,000 annual income pays at the same rate as one whose income is $1,000,000.
Social unrest and a deepening sense of unfairness are dangers to our national life which we must minimize by rigorous methods. People know that vast personal incomes come not only through the effort or ability or luck of those who receive them, but also because of the opportunities for advantage which Government itself contributes. Therefore, the duty rests upon the Government to restrict such incomes by very high taxes.
But what about small businesses?
III In the modern world scientific invention and mass production have brought many things within the reach of the average man which in an earlier age were available to few. With large-scale enterprise has come the great corporation drawing its resources from widely diversified activities and from a numerous group of investors. The community has profited in those cases in which large-scale production has resulted in substantial economies and lower prices.
The advantages and the protections conferred upon corporations by Government increase in value as the size of the corporation increases. Some of these advantages are granted by the State which conferred a charter upon the corporation; others are granted by other States which, as a matter of grace, allow the corporation to do local business within their borders. But perhaps the most important advantages, such as the carrying on of business between two or more States, are derived through the Federal Government. Great corporations are protected in a considerable measure from the taxing power and regulatory power of the States by virtue of the interstate character of their businesses. As the profit to such a corporation increases, so the value of its advantages and protection increases.
Furthermore, the drain of a depression upon the reserves of business puts a disproportionate strain upon the modestly capitalized small enterprise. Without such small enterprises our competitive economic society would cease. Size begets monopoly. Moreover, in the aggregate these little businesses furnish the indispensable local basis for those nationwide markets which alone can ensure the success of our mass production industries. Today our smaller corporations are fighting not only for their own local well-being but for that fairly distributed national prosperity which makes large-scale enterprise possible.
It seems only equitable, therefore, to adjust our tax system in accordance with economic capacity, advantage and fact. The smaller corporations should not carry burdens beyond their powers; the vast concentrations of capital should be ready to carry burdens commensurate with their powers and their advantages.
We have established the principle of graduated taxation in respect to personal incomes, gifts and estates. We should apply the same principle to corporations. ...
And relevant to the current corporate cash accumulation:
We should likewise discourage unwieldy and unnecessary corporate surpluses. ...
I'm always amazed at the degree to which we have the same political debates over and over again.
Posted: 12 Feb 2013 11:25 AM PST
Miles Corak:
There is nothing inevitable about low rates of economic mobility, by Miles Corak for Free Exchange: This week's Free exchange column discusses new research on rates of inter-generational social mobility (summary here). We are inviting experts in the field to comment on the piece and related research. Up first is Miles Corak...
[I]t seems to me that the series of papers by Long and Ferrie also suggest there is nothing inevitable about long-term persistence [in low economic mobility]. When labor markets become more dynamic, when public policy changes—particularly when it invests more broadly in the health, education and other forms of human capital of children—and when as a result families become more endowed with both monetary and non-monetary resources from which their children can benefit, then mobility will increase.
The real lesson from the historical research is not that there is anything inevitable about a low degree of inter-generational mobility, or that it signals more persistence than other research. The most privileged will do everything they can to perpetrate their status across generations, and in past eras the structure of labor markets and public policies permitted, and in some measure continue to permit, a non-level playing field.
Rather, the real lesson is that dynamic labor markets offering new opportunities to the population as a whole, progressive public policies of relatively more benefit to the relatively disadvantaged, and strong families with growing incomes and human capital will lead to much more mobility than aristocrats of a pervious era could ever have imagined.

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 12 Feb 2013 12:33 AM PST
My latest column begins with Eric Cantor's call for Republicans to talk about "helping folks":
For Obama, State of the Union Means State of the People, by Mark Thoma: House Majority Leader Eric Cantor believes that Republicans must show their concern for those struggling in this economy if they want to regain their political footing. "We've got to be talking about helping folks," he said Sunday on Meet the Press, "You've got so many millions of Americans who feel that they have become an afterthought."
There's a reason people feel that way. Republicans have refused to support any of the jobs proposals president Obama has put forward...
What do Republicans really want?:
Pretending to be on the side of the middle class while enacting policies that help businesses and the wealthy has worked well in the past, so it shouldn't be surprising to see Republicans try this again. Remember the failed promises of trickle-down economics?
But if Republicans -- and Obama -- want to steer the conversation away from the debt, I'm all for that:
President Obama also wants to change the conversation toward the needs of the millions of Americans who feel abandoned by politicians, and he intends to emphasize jobs and the economy in his State of the Union address. This is a welcome change. Instead of focusing on the debt, we should be discussing what we want the government to do. What are our priorities, what will they cost, and what can we, as a nation, afford? In the short-run, is there room for us to do more to help the unemployed? In the longer run, should government be bigger or smaller...? Can the composition of spending and taxes be improved? How fast does the debt need to be reduced, and should it be reduced through tax increase or spending cuts? As we get richer as a society – income doubles every thirty years or so – should the share of GDP devoted to helping people increase, or should government's share of output be limited to historical averages as many conservatives argue?
As we discuss these important questions about the size and role of government, we need to remember something that has been forgotten too often amid Republican attempts limit government intervention into the economy. The government has an important role to play in overcoming market failures... The private sector, on its own, will not provide the correct amounts of infrastructure, retirement security, health care spending, protection against monopoly and corruption, unemployment insurance, national defense, environmental regulation, education, food and drug safety, bank regulation, innovation, anti-trust action, safe working conditions, support of basic research, stabilization policy, and so on. Fixing these market failures through government action does not distort private sector economic activity away from the optimal outcome as many on the right would have us believe, it moves us closer to the ideal textbook economy. ...
Full column here.
Posted: 12 Feb 2013 12:24 AM PST
This graph in this post showing real per capita growth in government expenditures under recent presidents got more attention than I expected (e.g.), probably because for many people the growth under Obama was unexpectedly low. Here's the updated version of the graph (as before, this came to me via email):
Per-cap-gov-spending
Here are the notes that came with the older version of the graph:
Seeing the Krugman commentary comparing real government spending under Obama and Reagan made me curious about what it looks like if you express it in per capita terms? In particular, how does the Obama period compare with other presidencies in terms of penury/austerity versus spendthriftness?
To compare presidencies, I did the calculation two ways. One starts in the quarter before the president was elected (e.g., 2008Q4), the other starts in the first quarter of the presidency (e.g., 2009Q1). (The ARRA probably had some effect in Q1, but most of the change was simply economic conditions that the incoming president had nothing to do with, so I think I prefer the Q1 to Q1 method). ...
Posted: 12 Feb 2013 12:03 AM PST
Posted: 11 Feb 2013 01:27 PM PST
Remember the debate about whether the slow recovery was due to lack of demand, regulation, or taxes?:
Aggregate Demand and State-Level Employment, by Atif Mian and Amir Sufi, FRBSF Economic Letter: What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors. ...
Posted: 11 Feb 2013 10:44 AM PST
Ed Phelps does not like rational expectations:
Expecting the Unexpected: An Interview With Edmund Phelps, by Caroline Baum, Commentary, Bloomberg: ...I talked with [Edmund Phelps] ... about his views on rational expectations...
Q: So how did adaptive expectations morph into rational expectations?
A: The "scientists" from Chicago and MIT came along to say, we have a well-established theory of how prices and wages work. Before, we used a rule of thumb to explain or predict expectations: Such a rule is picked out of the air. They said, let's be scientific. In their mind, the scientific way is to suppose price and wage setters form their expectations with every bit as much understanding of markets as the expert economist seeking to model, or predict, their behavior. ...
Q: And what's the consequence of this putsch?
A: Craziness for one thing. You're not supposed to ask what to do if one economist has one model of the market and another economist a different model. The people in the market cannot follow both economists at the same time. One, if not both, of the economists must be wrong. ... Roman Frydman has made his career uncovering the impossibility of rational expectations in several contexts. ...
When I was getting into economics in the 1950s, we understood there could be times when a craze would drive stock prices very high. Or the reverse... But now that way of thinking is regarded by the rational expectations advocates as unscientific.
By the early 2000s, Chicago and MIT were saying we've licked inflation and put an end to unhealthy fluctuations –- only the healthy "vibrations" in rational expectations models remained. Prices are scientifically determined, they said. Expectations are right and therefore can't cause any mischief.
At a celebration in Boston for Paul Samuelson in 2004 or so, I had to listen to Ben Bernanke and Oliver Blanchard ... crowing that they had conquered the business cycle of old by introducing predictability in monetary policy making, which made it possible for the public to stop generating baseless swings in their expectations and adopt rational expectations...
Q: And how has that worked out?
A: Not well! ...
[There's more in the full interview.]