Monday, October 29, 2012

Sorry about the silence…

We’re bumbling toward the core of FrankenStorm Sandy.  That will reach us in about two hours or so, and is expected to last late into the night, with gusts well up above 60 to 70 MPH, and perhaps even higher.  But there are serious winds already puffing and shoving up under the eaves, and bending whole trees sideways.  So of course I thought I’d sit at my computer as long as the power is on, and offer an excuse for the long silence in this blog.  I have several to choose from. 

The first, and biggest, is that I have had some family responsibilities. Nothing really unexpected.  My father is 97 years old.  But he is suddenly surprisingly weak, and has lost a lot of weight in a short time.  The responsibilities that implies have kept me from this space for a while.

And I was tired, because I am also not 20 anymore.  It was great to be out on the Chesapeake last weekend, but it took a few days to recover. The trip included as much motoring as sailing, but there were a few of hours of good wind both days.  On Saturday we had our sails up coming out of the West River and pretty far down the bay toward our destination for the day, which was Hudson Creek in the Little Choptank.   We had to motor for an hour or two at the end of the day to get there in daylight.  But in the evening the wind came back, and we had a cold, very clear night at anchor with winds, judging from the volume of their drone through the rigging, somewhere up near twenty knots.   I slept like a baby, which means, of course, that I woke up every two hours, and since I was awake I went topside to check the anchor.  The cold felt very good.  I probably spent too much time up there, looking at stars I never see in the city, and the trees along the skyline, and the anchor light about 200 yard away of the only other boat out there in the night.  We had a rocking rolling ride all morning out of the Little Choptank on Sunday.  We were well into the Bay before the wind died, and we finally had to take our sails down and motor south to Solomons.  My thanks to Jeff and Monica for the opportunity to spend two days on a sailboat, which is something I haven’t done nearly enough in the last year or two, and probably won’t again for a while. 

There was a bit of discussion in the columns of government job creation, the topic of my last post.   The New York Times agreed with me, and Robert Samuelson exhibited an awe inspiring failure to grasp the implications of his own words in a column responding to the Times editorial.  If you read his column carefully, his argument is simply that government jobs don’t count because the private market will always achieve full employment without them.  If people aren’t required to fund government jobs by paying taxes they will buy something else, and that will create private sector jobs, so the government is just displacing jobs in the private sector.  In other words, he is relying on Say’s law.  Private markets will, in his mind, always achieve full employment of resources.  Of course the same argument can apply to jobs at General Electric or Apple, or any charity or church.  If Apple goes out of business and people can’t buy iPhones they will still have the money they would have spent on them, and they will presumably buy something else instead.  So by Samuelson's logic the jobs at Apple don’t count either.  If full employment is always guaranteed, then Apple didn’t really create those jobs building iPhones, it just displaced them from some other purpose. 

I was disappointed.  I had hoped that the argument for Romney’s (and apparently Samuelson’s) view that “the government does not create jobs” was more sophisticated than that.  I had hoped, and thought, that it was some misunderstanding of the Solow growth model, for example, which uses variables like population growth, savings rate, depreciation and capital investment to show how economies grow.  The misunderstanding would be that “capital investment” only means lathes and backhoes, but does not include roads, bridges, dams, and so on; in other words, that growth only occurs when private industry invests, not when government invests.  Of course that’s absurd. But it would at least show some background in the topic, and some knowledge of the theories of economic growth.

I have to wrap this up.  The storm is getting insistent.  But I’ll try to get back to this topic soon with more details. 

Friday, October 19, 2012

Another Mystery of Romneynomics

I want to get this out today because I won’t have time to post anything over the weekend.  I’ll be out sailing on the Cheasapeake Bay, helping to deliver a friend’s boat from Galesville just south of Annapolis to Solomons in the Patuxent River.   Hey, it’s a burden, but someone has to do it.

But I’ve been puzzling about one comment from the second Presidential debate, a comment that Romney made as Obama was ending his response about Candy Crowley’s question about jobs lost to China, toward the end of the debate.  I’ll quote the whole relevant section, so we have the context:

“MS. CROWLEY: Let me go to the president here, because we really are running out of time. And the question is can we ever get — we can’t get wages like that. It can’t be sustained here.
PRESIDENT OBAMA: Candy, there are some jobs that are not going to come back, because they’re low-wage, low-skill jobs. I want high- wage, high-skill jobs. That’s why we have to emphasize manufacturing. That’s why we have to invest in advanced manufacturing. That’s why we’ve got to make sure that we’ve got the best science and research in the world.
And when we talk about deficits, if we’re adding to our deficit for tax cuts for folks who don’t need them and we’re cutting investments in research and science that will create the next Apple, create the next new innovation that will sell products around the world, we will lose that race. If we’re not training engineers to make sure that they are equipped here in this country, then companies won’t come here. Those investments are what’s going to help to make sure that we continue to lead this world economy not just next year, but 10 years from now, 50 years from now, a hundred years from now.
MS. CROWLEY: Thanks, Mr. President.
Governor Romney —
MR. ROMNEY: Government does not create jobs. Government does not create jobs. (Chuckles.)

MS. CROWLEY: — but Governor Romney, I want to introduce you to Barry Green, because he’s going to have the last question to you first.

The italics are mine, but he said these words with great emphasis, as though this were a point he needed to make that the world was not quite getting, as though he were talking to people who were hard of hearing, or who were too ideologically stubborn to get this basic fact.  This appears to be a fundamental element in his economic philosophy: “government does not create jobs”.  It seems to be a fundamental element in the economic philosophy of the right, so I understand that he was calling out to his base when he said that.  But it’s an odd thing to say, in my opinion, and an odd thing to think.

The curious thing is that this is clearly false on the face of it, at least at the visible, factual level.  At that level this isn’t a matter of philosophy, it’s a matter of plain numbers: governments at various levels directly employ more than 22 million people.  (To be clear, only about 3 million of those jobs are federal, the rest are state and local government jobs.  I’ll throw in a graph from FRED below to illustrate.)   And these are only the jobs that are direct government employment; in addition to these jobs, the government hires contractors to do immense amounts of public work---to help build roads and dams and airports, to build ships and aircraft and tanks and all-terrain trucks for defense, and to help with all of that science research Obama mentioned in the quote above.   Governor Romney certainly knows that these jobs exist, and that the government creates them.  Why don’t all of these jobs count in Romney’s philosophy? 

But I think Romney’s idea is that aside from these jobs that government creates directly or by contract to accomplish public work---many of which he might think are unnecessary, even wasteful---the government’s role is negligible, that government efforts don’t have a big role in creating private sector jobs, which in his inner heart are the only real jobs.  His idea might be that the work of government simply gets in the way of private industry.  If that’s what he means, he might want to consider this letter to the editor of the Las Vegas Sun.  The writer, Mark Bird, points out that in Las Vegas government has done a few things that matter:

“Government created Hoover Dam, Interstate 15 and McCarran International Airport. Does any rational person really believe the MGM, Mirage or Venetian hotels are responsible for more jobs than these three government projects? Lake Mead supplies 90 percent of the water used in Las Vegas. Would these hotels have been built without the water source?”

Mr. Bird might have also mentioned the existence of police, EMT, firefighters, national defense, and numerous other public services that allow business people to go about their work in safety.  But this has all been said before, and I think that Governor Romney knows that these government efforts are vital to a healthy private sector. 

Or he might mean that in spite of all of the jobs the government creates directly or by contract as the nation’s largest customer, and the indirect jobs that are enabled by the existence of government’s products and services, the government also does harm by, for example, regulating industries that, if they could only work unfettered, might create many new jobs.  In that case he might want to consider his own words from the first Presidential debate:

“MR. LEHRER: All right. So, to finish quickly, briefly, on the economy, what is your view about the level of federal regulation of the economy right now? Is there too much, and in your case, Mr. President, is there -- should there be more? Beginning with you -- this is not a new two-minute segment -- to start, and we’ll go for a few minutes and then we’re going to go to health care. OK?
MR. ROMNEY: Regulation is essential. You can’t have a free market work if you don’t have regulation. As a business person, I had to have -- I needed to know the regulations. I needed them there. You couldn’t have people opening up banks in their -- in their garage and making loans. I mean, you have to have regulations so that you can have an economy work. Every free economy has good regulation.”

Once again, the italics are mine, but the emphasis is clear in his voice in his response.
So Governor Romney seems to understand that government, through regulations, creates the framework in which private business is conducted, and that having a framework like that (like having rules in a football game) can make the difference between a productive private sector and a brutal free-for-all in which no one wins.   And he clearly also knows about the people who work directly for government at various levels, and those whose businesses depend on the government as their customer.   He surely understands that even if those jobs don’t seem real to him they are very real to the people who do them.  And he knows as well that businesses do depend on the availability of clean water, power, roads and airports, and so on.  He’s sometimes complained while campaigning about the fact that the U.S. infrastructure is “crumbling”.  

Government is central to all of this, and in playing its role it provides jobs.  Romney knows this.  The right side of the political spectrum has to know all of this.  

So why is there such urgency and emphasis in Governor Romney’s denial of government’s role in the economy?  Why is this so important to the right?    

It’s a mystery.


Here’s the FRED graph.  The big blue line at the top is total government employment, at all levels; the red line at the bottom is federal government employment---notice that it’s been pretty level since the fifties, in spite of all the population growth since then.  The green is state government employment, and the orange is local government employment.

Sunday, October 14, 2012

Nick Rowe Agonistes

I’m astonished, once again, that a topic as fundamental and important as the impact of national deficits on future “generations” (quotes explained below) is still a debated issue in economics.  But apparently it is.  And once again it has created a flurry of blog posts, from Dean Baker, a frustrated response from Nick Rowe who wonders why his overlapping generations model has not settled this issue, and responses to Rowe from Brad DeLong, Dean Baker, Mark Thoma, and Paul Krugman.  I’ll also point to Robert Murphy here (worth reading for the comedy value alone, although I think he may have been too hard on David Brooks, who seems like a perfectly nice gentleman) and here, and Robert Waldman at Angry Bear here,   And of course as long as you’re in the neighborhood you can look at my own posts on phantoms in the dark, starting here…but if you’re in a link-following mood, start with Baker and Rowe.  They are where the latest flurry started.


I’m not sure that my additions to this will help resolve anything if the sheer mass of intellect represented at the end of those links has not.  But heck---it can’t hurt to make my comments, can it?  Particularly when the issue is this important.  It relates to many of the topics that are prominent in politics right now, and probably will be for the next decade or two at least.  National debt, the aging population, income distribution and redistribution, are all part of this discussion.  Professor Rowe’s overlapping generation model in particular is almost a direct picture of the impact of the creation of social security, and of the loss of social security if that should ever happen. 

The reason for the quotes around the word “generations” above is that this word has caused some confusion in the conversation.  Most of the papers and blog posts that discuss this topic have not actually been concerned with generations, with groups of people born at roughly the same time who travel through the same bit of history together: they use that word only to indicate that they are considering accounting periods---years, generally, or decades---that are far apart from each other in time.  They are asking whether debts incurred in one year will have a negative economic impact in some other year far in the future, a year populated by members of future generations, perhaps, but considering each period on its own merits without trying to separate the multiple cohorts that share earth at any time or follow each cohort through its time here.  But others do really mean cohorts; and sometimes, particularly when politicians are using it, the meaning intended by using that word slips from one interpretation to the other within the same argument, or even within the same sentence.

In the list of links above Krugman, Baker, Thoma and DeLong seem to me to intend the first meaning; they seem to be talking about the economic potential available to people alive at a particular future period.  But Nick Rowe and Robert Murphy, in particular, are looking instead at the second meaning.  They specifically write about, and give examples of, overlapping cohort-type generations, looking at the total consumption available to each generation through their lives, the total that they have consumed after passing through all the individual time periods in their bit of history.  I want to comment primarily on the examples discussed by Rowe and Murphy, but I’ll introduce that by saying that I don’t think the other writers actually respond to Rowe’s model.  Krugman recognizes the terminology issue but talks right past it when he says:

“First, however, let me suggest that the phrasing in terms of “future generations” can easily become a trap. It’s quite possible that debt can raise the consumption of one generation and reduce the consumption of the next generation during the period when members of both generations are still alive.”   

The emphasis is his, and that matters---because Rowe’s overlapping generations model, in his own example of it, and mine that I presented here and reproduce below, and very explicitly in Murphy, shows that consumption can be raised for the lifetime of the present generation and reduced for the lifetime of one or more generations in the far future, long after the present generation has left the field.  In other words, this model is explicitly not talking about “the period when members of both generations are still alive.”

Here’s the example I used in this post to explain it:

Each of the diagonal arrows represents a single generation, with consumption represented by apples available during two separate periods of their lives.  The first diagonal-line generation gets what Murphy at one point calls the “free market” allocation, which is a large number of apples when they are young, and then a small number when they are old, with a total of 4 apples over their lifetime.  Generation 2, counting from the left, has the good fortune to spend its young years under a free-market allocation, but then benefits from a redistribution---Social Security, perhaps---during its old years, with the result that as a generation they get to consume 5 apples over their lifetime.  Then they die, and new generations take their place.  The next generation spends both young and old periods under the redistribution scheme that helps the elderly, and they get 4 apples over their lifetime, and they die.  But then the redistribution scheme is repealed, and the fourth generation from the left has to accept redistribution away from itself during its young period, but does not benefit from redistribution toward itself during its old period.  Over their lives they only get to consume 3 apples.   The generation that benefited from all of this was absolutely not alive in the same time period as the generation that lost out.  And there’s nothing that requires the redistribution scheme to last only two generations; it could last fifty generations, and when it is removed the final generation that pays in when it is young and receives no benefit when it is older will pay the cost, perhaps hundreds of years later. 

I’m grateful to Professor Rowe for explaining this model to me in a comment after I first mentioned that I was puzzled about it.  I think the insight in this model is important.  We instituted Social Security in 1935, and generations have benefited from it ever since.  Now there is talk about changing it, and there are many who would like to end it or expect it to end on its own by going broke.  We can see that if it does end the last generation under SS runs some risk of having its lifetime consumption reduced.

But I may need another comment from Professor Rowe to clarify the model’s conclusions.  I don’t see this model as having anything directly to do with debt or deficits.  Nothing in the picture above mentioned how the redistribution was financed.  If the redistribution during the middle two periods is financed entirely through taxes, the same benefit is experienced by generation 2, and the same loss by generation 4.  And, of course, it’s possible to create debt for other reasons than redistribution of incomes: if a debt leaves everyone’s incomes the same through time, how does the overlapping generations model indict it?  If the redistribution it creates is random with respect to age in its impact, so that the while income may be redistributed between people, the result does not imply a redistribution between cohorts, how does an overlapping generations model indict it?  This model seems to be directed very narrowly on debt created to finance redistribution between generations.   And finally, the cost to a future generation only occurs when the redistribution is reversed.  If it is maintained forever, through taxes or through new debt, or even through the creation of new money, there is no future generation that endures a cost. 

Nick Rowe responses to this last criticism this way:

“Some people might argue that the interest rate is below the growth rate, and will stay that way, which means the economy is dynamically inefficient, ponzi schemes are sustainable, and what the economy really needs is a government-run ponzi scheme which really would not be a burden on future generations, because the debt plus interest would be rolled over forever, with no tax increase on any future generation. That's OK too, if you can convince us your assumption is correct.”

But that’s the way it has worked for a very long time.  National debt is rarely really paid off completely with budget surpluses, but it is often reduces as a share of GDP through GDP growth, which will happen only if growth is greater than whatever new deficits must be financed, including interest.  It is possible that the economy is dynamically inefficient with regard to federal debt due to a general political disapproval of debt in the public sector.  It seems arguable, at least, that it is the assertion that the future will be different from the past, the assertion that the debt will harm us more in the future than it does right now, that requires evidence.  (I don’t think that models and evidence to show that are impossible: total federal debt in the United States is now more than 100% of GDP, and there are big expenses looming in the middle distance.  There is a wide discussion right now, as there should be, about the impact and limits of debt overhang, with some people arguing that a national debt that is too large actually reduces growth.  But that’s a completely different argument than the overlapping generations model, and it’s an argument that’s still just beginning.)

And finally, even if we convince ourselves that this overlapping generations model directly addresses debt, rather than redistribution however financed, or otherwise convince ourselves that debt not only can but must impose a burden on some future cohort through their lifetime, that doesn’t really impact the argument that is being made by Krugman and the others.  They are time-slicers, arguing that debt may redistribute income within a future year but that it doesn’t burden the national population as a whole, young and old together, during that year; they aren’t really looking at cohorts, so their “zombie idea” can’t be killed by a model that may illuminate the redistributional impact of debt on cohorts.  They can agree with the overlapping generations model, and still maintain that current debt doesn’t impose a burden on future time slices or accounting periods. 

The overlapping generations model does not deny that, in fact.  During each vertical time slice in the picture above the economy creates 4 apples altogether, time period after time period.  I think that part of the point of the model is that some cohorts may be burdened over their lifetimes even if no time period suffers any economic damage from debt-financed redistribution schemes.

Saturday, October 6, 2012

Romney's Base-Broadening Curiosity

There have been plenty of responses to the first Presidential debate.  Here is a play-by-play, in a sense, from Ezra Klein and his colleagues at the Wonkblog that goes through the basic assertions that were made, and gives background for each. 

But there is an economics-related curiosity about one of Governor Romney’s assertions---or rather, about a sequence of claims that he has made in the past and seemed to amend during the debate.  They lead to a theoretical peculiarity related to his purpose in lowering tax rates and “broadening the base”. 

During the debate Romney denied that he intends to implement a tax cut that could result in a $5 trillion loss of revenue over a decade.  But he has called for a 20% tax rate cut for every income level.  He has also called for eliminating the alternative minimum tax, cutting the corporate tax rate to 25%, and maintaining all preferential tax treatment of capital gains and dividends.  If you do the math, this does amount to about $5 trillion of tax cuts over the next 10 years relative to the current policy baseline, and even more compared to current law (which would allow the Bush tax cuts to expire at the end of this year).   Still, Romney claims that other changes he intends to make, changes to “broaden the base”, will offset his tax rate changes to make the whole package revenue neutral---meaning that it will neither raise nor lose revenue for the government.  

When he says he wants to broaden the base, I think he may be trying to give the impression that he wants to get the 47% of the population who he claims pay no federal income taxes toss some money into the pot so that he can reduce taxes for the other 53% of the population.  That’s been the long-held vision on the right: everyone should have “skin in the game”, they say, ignoring the fact that almost everyone already does have skin in the tax game.  Nearly all adult American pay taxes of some kind.   But in general, broadening the base doesn’t need to mean including people in the tax system that are not now included: it means including income that is not now included.  That income may be earned by the same people who are now paying taxes, but it is income that is now sheltered from taxes by some special tax code provision.  And that’s why Romney has been talking about eliminating deductions and exemptions and other tax breaks to make up the revenue lost by his tax rate change.  Most studies have concluded that there is no set of tax break changes that could make the whole package revenue neutral without raising taxes on the middle class, and reducing taxes on the wealthy, and there was a strong suspicion on the left that a tax reduction for the wealthy was Romney’s real purpose.

But during the debate, Romney claimed that he had no intention reducing taxes for the wealthy, and he denied absolutely that he ever intended to raise taxes on the middle class.  He gave the strong impression that when he said the plan would be revenue neutral, he meant neutral at every income level: that no income level would pay any more or less taxes than they do now.  So the question is: what is the point, then?  If everyone pays the same taxes after the long exhausting ordeal of changing the tax code, why are we doing it?  And the answer seems, from other comments Romney has made, and comments from others on the right, that the purpose is not to change total taxes paid, but to lower the marginal tax rates.  The idea is that people respond to lower tax rates by working harder or working more. 

And now we get to the curious part. 

What is a tax rate?  Is it the additional taxes paid on each additional total dollar earned, or is it the nominal rate on each additional taxable dollar earned?  Here’s an example to show what this means.  Suppose you earn $100 million per year, you have $50 million in deductions---I know that this is a realistic example for all of you who read this---and your nominal tax rate on each additional taxable dollar is 20%.  Your taxable income is $100M total earned income-$50M deductions=$50M taxable income; 20% of that is $10 million, or 10% of the your total earned income.  Now suppose we eliminate all tax deductions and reduce the tax rate on taxable income to 10%.  Now you earn $100 million, have no deductions, and pay 10% of your total income, or $10 million, in taxes. Your nominal rate on taxable income has decreased, but your total tax bill hasn’t changed at all, just as Romney promised.

But Romney seemed to promise during the debate that the total tax payment rate will not change at any income level.  So as you rise to higher and higher income levels, you pay the same total amount in taxes at each new level that you would pay under current law.  The actual tax rate on each additional dollar earned has not changed, even though nominal tax rates on taxable income are reduced, because more of your income is now considered taxable.   

The curious thing is the apparent belief that people will respond to the nominal rate on taxable income, rather than the actual tax rate on total income. 

So what do you think?  Is that true?  And if so, why is it true?  Is this a kind of tax-rate blindness?  Is our logical incentive, the marginal tax on total income earned, hidden behind a taxable-income tax rate veil?