Monday, November 06, 2017

Stumbling Blocks Between Tax Cuts and Economic Growth

A few years ago, Bill Gale and I wrote a paper about the relationship between tax reform -- defined generally as lowering marginal tax rates and broadening the base on which those taxes are levied -- and economic growth, anticipating that there were likely to be claims in the near future that such tax changes would lead to economic growth. That future has arrived with the long-anticipated Republican tax plan unveiled last week.

The following quote from that paper appeared in the Christian Science Monitor last week:
Well-designed tax policies have the potential to raise economic growth. But there are many stumbling blocks along the way and certainly no guarantee that all tax changes will improve economic performance.
What are those stumbling blocks? The remainder of the paragraph from the paper gives some indication:
Given the various channels through which tax policy affects growth, a tax change will be more growth-inducing to the extent that it involves (i) large positive incentive (substitution) effects that encourage work, saving, and investment; (ii) small or negative income effects, including a careful targeting of tax cuts toward new economic activity, rather than providing windfall gains for previous activities; (iii) reductions in distortions across economic sectors and across different types of income and consumption; and (iv) minimal increases in, or reductions in, the budget deficit. 
The rationale for why there could be a link between tax reform and economic growth starts with the substitution effect, which in this case promotes economic activity because households get to keep more of the income they generate through that activity. Against this boost in economic activity are three countervailing forces:

1) The income effect, whereby the lower tax rate generates more after-tax income for a given amount of economic activity, encouraging higher consumption of all goods, including leisure. That reduces work. There is no guarantee that the substitution effect is greater than the income effect. As we note in the paper, this is more likely to happen when only the marginal tax rate changes. But if the whole schedule of tax rates is lower, then inframarginal tax rates are changing as well, and income effects are thus likely to be much larger.

2) The need to pay for the revenue loss associated with the tax cuts. This is the base broadening aspect of tax reform. In the Republican proposal, for example, the cap for the value of a mortgage on which interest can be deducted is lowered from $1 million to $500,000. This means lower deductions and thus some gain in tax revenues. Fine. But it also means less economic activity in housing, since we can expect fewer large homes or homes in pricey areas to be built. If lower marginal tax rates on work are thought to encourage work, then why would higher tax costs of housing not discourage housing? While discouraging further housing investment might be fine as public policy, the loss of economic activity in the housing sector is a drag on economic growth.

3) Alternatively, if the revenue loss is not made up contemporaneously through higher taxes elsewhere, then the horizon over which the economic growth is measured needs to include all of the time over which the higher debt due to the widening of the budget deficit is serviced. Servicing that incremental debt reduces economic activity elsewhere in the economy. If the tax revenue is not made up elsewhere, then what we have is not economic growth, but a shifting of economic activity to the present from the future.

So those are the stumbling blocks -- income effects, higher taxes due to base-broadening, and the costs of servicing incremental debt.

I expect to blog again soon about some other aspects of tax reform, focusing on income transfers.


Saturday, October 14, 2017

Another Example of the Washington Post's Decline

If this is journalism, The Washington Post should just pack it in. Here is the opening sentence in an article from yesterday's paper on recent Trump Administration policy, by Amy Goldstein and Juliet Halperin:

President Trump is throwing a bomb into the insurance marketplaces created under the Affordable Care Act, choosing to end critical payments to health insurers that help millions of lower-income Americans afford coverage.

Note the incendiary language, "throwing a bomb." Paragraph nine of the same article reads as follows:

The cost-sharing reductions — or CSRs, as they are known — have long been the subject of a political and legal seesaw. Congressional Republicans argued that the sprawling 2010 health-care law that established them does not include specific language providing appropriations to cover the government’s cost. House Republicans sued HHS over the payments during President Barack Obama’s second term. A federal court agreed that they were illegal, and the case has been pending before the U.S. Court of Appeals for the D.C. Circuit.

I presume that the reporters knew the information they wrote in paragraph nine before writing the first sentence. Yet they characterize ending payments that a federal court has deemed illegal as "throwing a bomb." I expect more from professionals, so why, other than the fact that my local paper reprinted this, would I seek out The Washington Post?

I wouldn't. By contrast, read this post at Powerline by John Hinderaker. It provides a legal background, it quotes from the judge's decision, and links to another source about the likely effect of the policy change. If the amateurs can do a better job than the professionals, then it is no surprise that traditional news outlets are in decline.

Friday, August 18, 2017

Charlottesville: The Criminal, the Moral, and the Constitutional

A lot of ink has been spilled over the tragic events in Charlottesville last weekend. I spent the early part of the week trying to find good summaries and timelines of the events. I found two that were particularly helpful. The first was in the Chronicle of Higher Education, from University of Virginia President Terry Sullivan's perspective. She continues to be on the front lines of many challenges confronting higher education, and I think she's holding up pretty well. The second was in Buzzfeed, in which reporter Blake Montgomery gave his first-person account.

I spent the last few days thinking about my own response and the various responses of others to the events. I think that one problem in the way the nation is articulating its response is that there are (at least) three elements of the events in Charlottesville that need to be distinguished.

The easiest element to identify is the Criminal. The horrific incident, in which a car being driven by James Alex Fields Jr. plowed through a crowd and crashed into other cars, left 1 person dead and 19 others wounded. This incident happened after the rally was declared an unlawful assembly. Fields will be prosecuted as a criminal, for offenses including second-degree murder.

The Moral element is also pretty easy to identify. Many, probably almost all, of the participants in the "Unite the Right" rally draped themselves in the imagery of the Confederacy or the Nazis. I can only imagine how pathetic life would have to be to hide behind symbols of genocide and the regimes that inflicted them. (Kevin Williamson has some ideas at NRO.) To do so in proximity to those who have suffered or lost loved ones to those regimes is a heinous act, for which there is no moral justification.

But here the Constitutional element is relevant. That heinous act of spewing white nationalism, whether through conventional media for speech or in an otherwise peaceful assembly, is protected by the First Amendment. Those who organized the "Unite the Right" rally had the right to do so, and they should not be threatened with or subjected to violence for doing so. This is true despite the fact that their ideology, if they could implement it, would impose violence on others. And those on the Left who seek to deny that right to speak and assemble -- an extreme form of the heckler's veto that is so evident on college campuses today -- should be criticized severely. The same is true of those who, during last year's Presidential campaign, are reported to have perpetrated violence against people attending a political event for the then-candidate Trump. The ACLU was right to file the lawsuit on behalf of the "Unite the Right" organizers who wanted the event at the site of the Robert E. Lee statue. They are also on solid ground to, going forward, refuse to represent such groups if they insist on carrying firearms to such events.

Prosecute the Criminal, Condemn the (IM)Moral, and Uphold the Constitutional.


Wednesday, August 09, 2017

Leadership in Real Time and for the Long Term




I define leadership as the mobilization of people and their resources toward a common goal. At Google, I presume that an example of that goal is to deliver the best user experience in Internet search and a growing area of online activities (like this blog's platform), so that the company can sell the users' attention to advertisers and generate profits. Google has, for the last two decades, outperformed its competitors, in my view because it has had a business model and culture that attracts talented people and encourages them to innovate on behalf of the company. (Great colleges and universities excel in the same way.)

I value the services Google provides and so it is unfortunate to see how poorly its leadership, specifically CEO Sundar Pichai, has responded to the circulation of a memo written by employee James Damore, Google's Ideological Echo Chamber: How bias clouds our thinking about diversity and inclusion. Pichai's response was twofold: first, circulating this e-mail to all employees, and second, firing Damore within days of the memo going viral.

Pichai's response is, in my view, a failure of leadership. The leader has to distinguish what is a short term problem that must be addressed immediately and what is a longer term challenge or opportunity that can be taken up with more patience and deliberation. He didn't do this very well. Here's what I would have recommended that he do in his communication with employees:

1. Immediately, clarify what was presented (and what wasn't) in the memo

In his e-mail, Pichai had the opportunity to identify the central argument in the memo and distinguish it from the more salacious claims about it that arose as it went viral. Instead, he does the opposite, stating that the memo crosses the line "by advancing harmful gender stereotypes in our workplace." Damore explicitly does not do this. He provides this figure to illustrate his point:






The relevance of the figure is that Damore states in the bottom panel that he doesn't endorse stereotyping people. If that's not obvious from the figure, then it should be obvious from the paragraph in the memo immediately preceding it:

Note, I’m not saying that all men differ from all women in the following ways or that these differences are “just.” I’m simply stating that the distribution of preferences and abilities of men and women differ in part due to biological causes and that these differences may explain why we don’t see equal representation of women in tech and leadership. Many of these differences are small and there’s significant overlap between men and women, so you can’t say anything about an individual given these population level distributions.

Damore is not saying that the tech industry is structured to be equally accessible to men and women. He is saying that even if it were, equal representation would not necessarily obtain and should therefore be reconsidered as the standard. Contrary to what Pichai writes in his e-mail, Damore does not "suggest a group of our colleagues have traits that make them less biologically suited to that work." That would require that Google have different hiring standards for men and women. If the standards are the same, then everyone working at Google has enough of the relevant traits to be suited for that work.

In my view, Pichai compounded the widespread misunderstandings of what was presented in the memo at the precise moment when he should have been clarifying them.


2. Immediately, set grownup expectations for how to behave as a co-worker when you find something offensive.

On two occasions in the memo, Pichai uses the phrase, that something is "not OK." His language is reminiscent of what day care workers say to toddlers who have gone a bit past their scheduled nap time and are acting out. Could we please stop infantilizing young adults? The simple rule for engaging with colleagues in a forum like the one to which Damore posted his ideas should be that if you are offended by something, give the author the benefit of the doubt that the offense was unintended. Ask for clarification of the offending statements to see if there is a less offensive way of presenting them. Challenge the offensive claim with evidence to the contrary. Do not mischaracterize or oversimplify the author's claims and then get outraged over your own errors of understanding. (For some absurd examples, see several of the quotes in this Washington Post column.)

I work in an industry and a profession that operates like such a forum, and I have seldom regretted following this simple rule. Think of how much better our workplaces would be if it were more widely followed. As CEO of one of the most important companies in the world, Pichai should be encouraging its adoption rather than accommodating its opposite.

3. Set an aspirational goal for the longer term

Pichai does acknowledge that "many points raised in the memo ... are important topics," but he gives no indication of any changes that will occur at Google in light of them. That's a mistake.  The memo makes assertions of fact and assertions of causality. It provides some evidence to support those assertions, but it doesn't presume to be comprehensive in doing so. Google should rectify that. Commission a panel of distinguished outside experts to report on the best evidence possible on whether the assertions are true or not. Set a deadline of a few months and then promise a webinar or similar venue for the panel to present its findings. Allow time for employees to formulate and act on their best response to the memo, rather than their first response to the memo.

Failure to do this undermines Pichai's claim that "People must feel free to express dissent." He compounds this problem by firing Damore. Termination is the harshest sanction that could be imposed. A lesser sanction, like a period of probation, would not preclude a termination at a later time if warranted.

The irony here is that since Google owns YouTube, it already has the benefit of much of that expertise. See, for example, this video, in which Steven Pinker and Elizabeth Spelke debate some of the evidence on gender differences in the wake of the remarks that Larry Summers made at an NBER conference in 2005. The response to those remarks, which bears some similarity to the response to the Google memo, ultimately led to him resigning the presidency of Harvard about a year later. (I blogged about that episode here and here.) 

Sunday, May 21, 2017

Thank you, Mayor Mitch Landrieu

Simply the best statement on healing a racial divide in many years, on the occasion of New Orleans removing four statues to Confederate leaders. This is what leadership in public office sounds like.

So I am not judging anybody, I am not judging people. We all take our own journey on race. I just hope people listen like I did when my dear friend Wynton Marsalis helped me see the truth. He asked me to think about all the people who have left New Orleans because of our exclusionary attitudes.

Another friend asked me to consider these four monuments from the perspective of an African American mother or father trying to explain to their fifth grade daughter who Robert E. Lee is and why he stands atop of our beautiful city. Can you do it?

Can you look into that young girl’s eyes and convince her that Robert E. Lee is there to encourage her? Do you think she will feel inspired and hopeful by that story? Do these monuments help her see a future with limitless potential? Have you ever thought that if her potential is limited, yours and mine are too?

Read the whole thing.