Tuesday, January 16, 2018

A Decline in Brand Value

The University of Chicago's Allan Sanderson alerts me to this story about the Chicago real estate market:
Condos in Trump International Hotel & Tower sold for an average of $747 a square foot in 2017....That's down almost 12 percent from 2016....In the same period, prices in the downtown condo market overall rose by 2.8 percent.

Saturday, January 13, 2018

Robert Barro on the Tax Bill

My colleague Robert Barro is enthusiastic about the recently passed tax bill. You can read his analysis of it here. His bottom line:
I estimate that the total tax package will create extra GDP growth of 1.1% a year through 2019. The main effect (0.8%) comes from changing the individual tax code, with the remainder from the corporate reform. Over the following eight years, the projected growth rate rises by 0.2 to 0.3 percentage point a year because of the law’s expansionary effects on long-run capital and GDP per worker.

Thursday, January 11, 2018

Measuring Bias, or Reflecting Reality?

The above graphic, from today's NY Times, is intended to show bias in economics textbooks. I am not so sure that is the right interpretation.

In the world, only 4 percent of CEOs (of Fortune 500 companies) are women, so does the figure of 6 percent shown above demonstrate underrepresentation of women in textbooks or an accurate reflection of reality? Similarly, policymakers mentioned in texts are most often Presidents or Fed chairs. Historically, only one woman has been a member of this group. Economists mentioned in texts are most often important historical figures (Smith, Ricardo, Keynes) or prominent modern economists, such as Nobel laureates. Once again, 8 percent is higher than for the population being sampled.

To be sure, the role of women in society is changing, and in some circles there is some bias. But measuring the amount of bias is hard. The graphic above is not a useful gauge.

Or maybe in my next edition, I should add a discussion of Paulina Volcker's disinflation.

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Update: Some twitter commentators seemed to misinterpret my cheeky last line. At the risk of being pedantic, let me explain: Textbooks reflect reality, which includes a history in which men played a larger role than women in some spheres of life. If a history professor were to write a text on the history of presidential politics, and you were to find that there were more mentions of men than women in the book, would that be evidence that the historian is biased? I don't think so. The writer has to reflect what occurred and is not free to change the gender of historical protagonists.

Thursday, December 28, 2017

A Quick Quiz

According to the staff of the Joint Committee on Taxation, before the recent change in the tax law, taxpayers earning more than $1 million a year were scheduled to pay 19.3 percent of all federal taxes in 2019. What impact does the new tax law have on this percentage?

(a) It falls to 17.8 percent.
(b) It falls to 18.7 percent.
(c) It stays the same.
(d) It rises to 19.8 percent.

Find the answer here. (First table, seventh column, penultimate row.)

Friday, December 22, 2017

The Case Against Taxing Higher Ed

Click here to read my column in Sunday's NY Times.

Monday, December 18, 2017

Tax Cuts for the Rich?

As I have stated repeatedly, I have mixed feelings about the tax bill going through Congress. There is a lot of it that I don't like. But I nonetheless disagree with much of the commentary of its critics. A common refrain is that the bill entails big tax cuts for the rich. I am not so sure.

True, the top tax rate is reduced by 2.6 percentage points. But for those in states with a personal income tax, this merely offsets the loss of the state and local tax deduction. And if you are in a high tax state like California, where the top tax rate is 13.3 percent, the offset is far from complete.

The heart of the tax bill is a cut in the corporate tax rate. To be sure, in the short run, this change benefits shareholders, who are generally wealthier than average. But in the long run, increased profitability should increase capital accumulation and productivity, raising wages. That is, workers will benefit from the corporate rate cut.

Economists differ in how large this effect is. The Tax Policy Center, whose numbers are widely quoted, estimates that 20 percent of the corporate tax cut goes to labor. That seems low to me. I have not seen a poll of economists asking what percentage of corporate taxes is paid by labor in the long run (calling the IGM panel), but I would guess that many economists would put the number at higher than 20 percent.

In any event, when you see distribution tables for this tax bill, remember that these numbers are not facts, they are judgments.

Saturday, December 16, 2017

I talk with NPR

Tuesday, December 12, 2017

A New, More Affordable Way to Read My Favorite Textbook

From Inside Higher Ed
The new offer, called Cengage Unlimited, will give students access to more than 20,000 Cengage products across 70 disciplines and 675 course areas for $119.99 a semester.

Tuesday, December 05, 2017

Paul Krugman...Sigh

I usually refrain from commenting on all the silliness found over at Paul Krugman's blog. But in a post a couple days ago, Paul is especially dyspeptic and calls me out by name. Let me offer a few comments.

1. Paul says I have never admitted to making a math error. Well, I would if I thought I made such an error. I make them all the time. But in this case I am not convinced.  Neither is University of Chicago professor Casey Mulligan, who thinks Paul made a math error. I spoke with several other economists (some of whom share Paul's politics) and they don't see Paul's point either.*

2. Paul says that economists like me have not been sufficiently critical of President Trump and his policies. Let me point out
A . I said during the election that I would not vote for him.
B.  I criticized his obsession with the trade deficit.
C.  I encouraged tax reform to be revenue neutral.
D.  I called the tax bill an "unworkable mess."
E.  I lamented the new tax on university endowments.
3. Paul thinks that economists like me should be more vocal about how horrible the tax bill is. I might be if I thought it was completely horrible, but despite its many flaws, there are parts that I like, including the lower corporate tax rate, the move to a territorial tax system, the reduced deduction for state and local taxes, and the scaled back mortgage interest deduction (in the House bill). Overall, the tax bill is a mixed bag, with some bad features and some good features.

4. Paul seems to take the position that unless you agree with him about the tax bill, you are unprincipled. In the world as I see it, reasonable people can disagree, and progress is best made when people do not question the moral rectitude of others simply because they hold different opinions.

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*Update: Robert Waldmann looks at the issue, concluding "no one has made an algebra mistake. Taxes on capital and capital income are different."

Monday, December 04, 2017

What I've Been Watching

This came out last year, but I only heard about it recently: The Night Manager, a six-part miniseries based on the John le Carre novel. Compelling story and great acting. Available now via Amazon.

Monday, November 13, 2017

The Case Against the Harvard-Yale Game

Sunday, November 05, 2017

Furman on Tax Reform

I don't agree with all of it, but these slides from a recent talk by Jason Furman make a lot of good points.

Saturday, November 04, 2017

Taxing Higher Ed

One of the most surprising parts of the proposed tax bill is its tax on university endowments. If my rough calculations are correct, the tax would cost schools like Harvard between $1,000 and $2,000 per student every year.

Is there a good argument for this policy? Not that I can see.

Friday, November 03, 2017

The Good, the Bad, and the Fixable

Click here to read my column in Sunday's NY Times on the Trump tax plan.

Wednesday, October 25, 2017

Where I am today

Here.  Thank you, CEE.

Tuesday, October 24, 2017

The Dynamic Furman Ratio

There has been a lot (maybe too much) commentary on my simple pedagogical exercise. To move the discussion forward, let me offer a challenge to readers: What is the dynamic Furman ratio in such a model--that is, the ratio the wage increase to the dynamic revenue loss, which I will call dw/dz?

Note that


dz = - d[t*f '(k)*k]

but now we take into account that k and f '(k) will change with t.

Furman was the first to point out to me that, for Cobb-Douglas, the correct answer is: 


dw/dz = (1-α) / (1- α - t).


For a capital share and tax rate of 1/3, we get dw/dz = 2.  Each dollar of a capital tax cut (dynamicly scored) raises wages by two dollars. See the derivation at Cochrane's blog. (Note that John and I have a slightly different notation, so don't be misled by the minus sign.)


What is the general case?  


I have not worked it out, but I will offer a conjecture: You can write dw/dz as a function of the tax rate, the capital share, and the elasticity of substitution between capital and labor. 


You can find a helpful hint in footnote 19 of this paper.

Monday, October 23, 2017

My Latest

Click here to read "Friedman’s Presidential Address in the Evolution of Macroeconomic Thought," an essay I just finished writing with Ricardo Reis for the Journal of Economic Perspectives.

Wednesday, October 18, 2017

An Exercise for My Readers

There has been a lot of discussion lately about how much a cut in the tax on capital will increase wages. So I thought I would pose a relevant exercise for my readers.

An open economy has the production function y = f(k), where y is output per worker and k is capital per worker. The capital stock adjusts so that the after-tax marginal product of capital equals the exogenously given world interest rate r.

r = (1-t)f '(k).

Wages are set by the marginal product of labor, which (by Euler's theorem) equals

w = f(k) -f '(k)*k.

We cut the tax rate t.  Because f '(k)*k is the tax base, the static cost of the tax cut (per worker) is

dx = -f '(k)*k*dt.

How much will the tax cut increase wages? In particular, what is dw/dx? The first person to email me the correct answer will get a shout-out on my blog.

By the way, the same calculation would apply to the steady-state of a Ramsey model of a closed economy, where r would be interpreted as the rate of time preference.

Bonus question: If there are positive externalities to capital accumulation, as suggested by DeLong and Summers, would the effect of the tax cut on wages be larger or smaller than in the standard neoclassical model above?

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Update: Casey Mulligan, who has been thinking along similar lines, was the first to email me the correct answer:

dw/dx = 1/(1 - t).

So if the tax rate is one third, then every dollar of tax cut to capital (on a static basis) raises wages by $1.50.

And if DeLong and Summers are right that there are positive externalities to capital, the effect will be larger than $1.50.

Update 2: A friend asks to see the proof. Here goes. Start with my second equation

w = f(k) -f '(k)*k.

Take the total differential of this equation to get

dw = -k*f "(k)*dk.

This equation relates the change in wages to the change in capital. To find dk, use my first equation

r = (1-t)f '(k).

Take the total differential and solve for dk to obtain

dk = {f '(k)/[(1-t)*f "(k)]}*dt

This equation relates the change in capital to the change in the tax rate. Substitute this expression into the dw equation to obtain

dw = -[k*f '(k)/(1-t)]*dt.

This equation relates the change in wages to the change in the tax rate. The third equation in the model can be rewritten as

dt = dx/[-f '(k)*k].

This equation relates the change in the tax rate to the static revenue loss. Substitute this expression into the preceding equation to yield the result

dw/dx = 1/(1 - t).

I must confess that I am amazed at how simply this turns out. In particular, I do not have much intuition for why, for example, the answer does not depend on the production function.

By the way, this derivative (dw/dx) is slightly different from what Casey calls the Furman ratio in his post.  Casey looks at the ratio of the wage change to the dynamic revenue loss, whereas dw/dx is the ratio of the wage change to the static revenue loss. We might call dw/dx the static Furman ratio. The dynamic Furman ratio is typically larger.

Update 3: Alan Auerbach emails me the following comment:

Just to place this result in context, it's a combination of (1) the standard result that in a small open economy labor bears 100% of a small capital income tax; and (2) the fact that starting at a positive tax rate, the burden of a tax increase exceeds revenue collection due to the first-order deadweight loss.


Most people forget about the second point when arguing about where between 0 and 100% of a tax cut goes to labor vs. capital, and this is exacerbated by the fact that distribution tables assume revenue change = burden change, except in special cases (such as where a cut in capital gains taxes is presumed to lose little or no revenue).

Update 4: John Cochrane weighs in.

Update 5: Steven Landsburg weighs in.

Monday, October 09, 2017

A Talk from the CEA Chair

Saturday, September 30, 2017

What I am reading

Two of my favorite young macroeconomists (and former students) have a new essay on Identification in Macroeconomics.