Thursday, May 31, 2012

Demand, Demand, Demand.

Charts of the day:


Here's one charting the unemployment rate versus percentage of businesses citing lack of demand (poor sales) as their number one problem.


Along similar lines, here's a chart based on surveys from businesses citing their biggest concerns:




Note that taxes, government regulations, and quality of labor are all either roughly the same as they've been for awhile or not a huge issue right now. Interestingly enough, government regulations look like they were a larger concern during the boom in the 90s than they are today. The major issue looks to be poor sales, that is, a lack of demand for firms' goods and services.


I wish I had time to elaborate more on this, but I've been reading too many things about how this is largely a structural problem (that is, one from workers not being trained for the jobs available, too much regulation, high taxes, etc), not a demand (recessionary) problem. It doesn't seem that way, though, based on what the firms themselves are saying. Sure, they've got concerns about regulations and taxes, but they don't seem to be any worse than they used to be. More on this later.

Tuesday, May 29, 2012

More On Public-Sector Workers

The other day I wrote a post about compensation levels of state and local public-sector workers and I caught a lot of flak for it. No, I'm not going to apologize for my post. I am, however, going to clarify the point I was trying to make in the post, because the post seemed to have two messages in it. Also, somewhere in the comments the argument got lost and turned into a discussion about the costs and benefits of public-sector unionization and collective bargaining on the effectiveness of government. 


Anyways, the main point of the post was whether or not public sector workers are overpaid. The second point was whether they were the cause of state budget deficits as a result of being overpaid. Well, I cited studies (here, here and here) that indicated that there was no evidence that state and local employees were overpaid. You can argue that other studies say otherwise, I suppose, but the ones I cited seemed to be pretty carefully done. Anyways, Republican governors like Scott Walker have turned this into a debate as to whether public sector unions are a major cause of state budget deficits. I argue that they are not. Instead, I asserted that the recession was; you can clearly see that there doesn't seem to be a strong link between collective bargaining rights and budget crises on a state-by-state basis. It's probably the recession (and all that comes with it, like depressed housing prices), or rising health care costs.


That being said, I wouldn't mind having a conversation about whether collective bargaining makes states better or worse off. It is not an easy thing to prove one way or another, since there are always about a  million variables you'd have to take into account. I'm not going to throw my weight one way or another, because I honestly haven't done enough research yet. I will say that there are corrupt unions and there are unions that genuinely try to make work better for their members. Demonizing or exalting all of them doesn't do anyone any good. The degree to which they affect the efficiency of state governments is probably devilishly hard to determine, but here's a bit of food for thought if any of  you are curious:


Here's the Pew Center's state-by-state government report card. It has some nice graphics and maps that break down each state government's performance in various areas. And here's a map showing the specific collective bargaining rights of public sector workers on a state-by-state basis. Again, there are many more factors than just unionization, but still. Food for thought and all.


P.S. Thanks to all commenters for the discussion on my last post about this subject. It helps keep me honest, because God knows I can get ideological sometimes.

Saturday, May 26, 2012

A Nation of Wusses

I bet you thought I was going to write something provocative and controversial, didn't you? Well, on most other days, you'd be right about that. But not today. Nope, today I can't do much blogging because my computer is in need of a good old fashioned purging. So in my absence, I leave you with music. this time, a song by one of my favorite trance groups, Infected Mushroom. So, without further ado, a song to listen to while the world slogs through the Lesser Depression, here it is, Nation of Wusses:




Also, this is a great pump-up song. So go listen to it. Now.

Thursday, May 24, 2012

Public Sector Workers: Overpaid Bureaucrats?

This year, Mitt Romney declared that, "Average government workers are now making $30,000 a year more than the average private-sector worker." This is a popular talking-point among many current Republican governors, who have attempted to argue that state and local public-sector employees are preposterously overpaid, in large part because they are unionized.   This was a big reason for the infamous union-busting debacles in Wisconsin and Ohio (Senate Bill 5, anyone?). The governors argued that the exhorbitant pay of state and local workers was the main reason for such large state budget deficits. On the face of it, it may appear that some studies or news reports have shown that this is true, but the reality is that many of them fail to account for several factors.


Over at EPI, they have a great explanation of why many public sector employees are perceived to be overpaid:
"For starters, public sector workers are, as a group, more highly educated, work in more highly paid occupations and they tend to work moderately fewer hours than those in the private sector. In addition, it is frequently noted that public employees earn more in benefits such as health care and pensions: therefore, a simple wage comparison will not accurately capture difference in total compensation."
So unless we control for these differences in hours worked, total compensation (including health and retirement benefits), and different levels of education, any comparison presented would be highly misleading at best and utterly meaningless at worst. Fortunately for us all, there have been several different academic studies done to try to control for these factors. So what were the results?

Well, this table sums it up nicely:
After controlling for different levels of education, hours worked, and including total compensation instead of wages alone, the results are that anyone with a bachelor's degree or above have drastically lower total compensations than comparable workers in the private sector. It is true, however, that the less-educated workers on public payrolls have slightly higher total compensation, but this is nowhere even close to the numbers that Mitt Romney threw out. Their higher compensation is, as you can see, all from slightly higher health/retirement benefits, not from wages. And many state retirement plans are in the form of something called "deferred contributions," where workers choose to have their pay put into a retirement or health plan for collection later on in life. So the fact that they recieve higher total compensation due to increased benefits is in many cases because workers themselves chose to direct their pay there, not because the government is putting more money into benefit plans.  David Cay Johnston has a good piece that explains this better than I probably can.

The fact that public sector workers are more highly-educated than private-sector workers (54% of public sector workers hold a four year degree versus 35% in the private sector) also makes the slightly higher compensation for less educated workers much less prevalent than it would be in the private sector. So sure, if you want to say that in some cases, public sector workers make a little bit more (5-9% more), then I guess you could say that. But you could also say that private sector workers who are more educated make anywhere from 21 to 37% more than their public counterparts.

The high levels of unionization among public-sector employees has, in fact, created a wage floor of sorts, whereas declining unionization in the private sector has caused this floor to collapse. However, research has been done that shows that trying to eliminate this by busting public unions will lead wage growth to further lag behind worker productivity, which has been cited as a factor in deterioration of middle class earnings. And, I know this gets a bit convoluted, but some jobs, like police and firefighters, have no real alternative non-government employment, so their unionization is a critical counterbalance to legislative efforts to hold their total compensation levels below market pricing. For more reading on that, check out the conclusion of this study.

In any case, Romney's statement mentioned that on average, public sector workers are making $30,000 more a year than public sector workers. I've just shown you the breakdown of total compensation for comparable workers with various levels of education. Let's take Romney's statement and see how the average public vs. private sector workers do:

Sure doesn't look like they're rollin' in it. They're making $2,001 less a year on average. Overpaid indeed. So, like I said, maybe unionized workers with lower levels of education make slightly more in total compensation, but most public sector workers don't seem to be grossly overpaid. They sure as hell aren't pulling in an extra $30,000 a year over private sector workers. In fact, most of the more educated ones are horribly underpaid compared to their private sector counterparts. Are unions bloated? Maybe they are, but it sure doesn't seem like they're extorting huge sums of money from taxpayers in the form of generous benefits and salaries. You could argue about the costs vs benefits of allowing collective bargaining and unionization. That would be a conversation worth having. But the conversation we're having now with governors like Scott Walker and John Kasich is whether or not unions are bankrupting states. 

State budget problems don't appear to be primarily a result of unionization. State budget problems are an issue because of the recession and all that accompanies it, as well as rising health care costs. Recessions reduce tax revenues and increase safety net outlays. Of course state budgets are going to be in shambles, they're paying out more and taking in less! It also doesn't make sense for unionization to be the cause of state budget woes, given that levels of unionization and public-sector compensation haven't grown. Anyways, you can argue about unionization all you want, but there's really not a lot of evidence that public sector unions are the primary culprit when discussing current state budget problems.

Update: I've clarified and expanded upon this topic in a newer blog post here.

Tuesday, May 22, 2012

3000 Views, a Term Paper, and Godwin's Law

It seems like just yesterday I was posting about how I'd hit 2,000 views on this blog. In fact, it was barely over a month ago. Now we've hit 3,000 views! It seems like a paltry sum compared to the big-shots in the blogosphere, but I take what I can get. Anyways, thanks to everyone who follows this blog and gives me feedback/criticism/praise on it. As I always say, I'll keep blogging if you keep reading.


Now then, on to business. I just put the finishing touches on my Affordable Care Act term paper, which I now grudgingly deem acceptable for public consumption. Ten pages seems both too long and too short for what I had in mind, so I may have had to be grossly one-sided gloss over some things more than I'd have liked, but oh well. 


You can download my paper via Dropbox here. It should open it up in your browser first and you can choose to download the word document from there. Feel free to offer criticism and (hopefully) praise!


Interesting things I've read today:
  • David Frum comments on a study about how people who watch Fox News have their brains turned to molten slag on average answer fewer policy-related questions correctly than people who watch no news at all.
  • Robert Reich tells the class of 2012 that they're f***ed. No, really, he does. More or less.
  • Matt Yglesias tells us how GOP Representative Daniel Webster criticized the American Community Survey for being a "random" survey and not being scientific. Apparently he flunked statistics doesn't understand how surveys are supposed to work.
  • Ezra Klein talks about how RomneyCare is seems to be working in Massachusetts to slow the growth of medical costs. Maybe, just maybe, Obamacare will do the same. Since, you know, they're the same law and all.
  • Scott Sumner wishes that reporters would ask Ben Bernanke the hard questions. Also, the Fed needs to adopt NGDP targeting so it can offset fiscal contraction. Sounds like a good idea to me.
  • And finally, Paul Krugman provides us with a lovely example of a right-wing think tank that has gone off the deep end basically into Godwin's law territory:
  • Because the Unabomber believes in global warming, it must be terrible to believe in it, too. Hard to claim objectivity and rationality when you throw something like this out. I wish I could say this was an isolated incident, but it isn't

Sunday, May 20, 2012

Sunday, Lazy Sunday (Self-Indulgent)

This is a bit of a change of pace for me in terms of blog topics, but I'm going to try to incorporate a few posts every so often that are less cerebral and more self-indulgent. Anyways, I finally finished that term paper, so I'll be uploading it for your reading (dis)pleasure after I've had it edited and polished. Naturally, the fact that I've finished something makes me feel entitled to spend the entirety of today being unkempt and doing nothing useful. I guess I'd call it the world's laziest Sabbath?


I don't know, though, it seems like my paper is missing a certain je-ne-sais-quoi. Maybe it's because my blog posts about Obamacare have bits of sarcasm and profanity sprinkled in to keep things interesting. Too bad I can't do that with a public finance paper. It's hard to not feel like you're rambling when you have to write ten pages about something. Boo-hoo, woe is me, right? Anyways, that'll be uploaded sometime in the next day or two for those of you who are interested.


And now, I'm going to inaugurate a bit of a new tradition for the blog, which I'll dub my song of the week. So, without further ado, the first song of the week. Also, thanks go out to Danny Case for it.




It's just a teenage wasteland.

Friday, May 18, 2012

The Unacceptable Result

So here I am, procrastinating on my term paper, when I come across a statement released by Speaker John Boehner's office yesterday that was entitled: "Anything Short of Full Obamacare Repeal is Unacceptable." Basically the statement is a list of talking points that ACA opponents consistently list off when they're asked why they want to repeal the law. I'm not going to run down the list of talking points and tell you why they're misleading or wrong, since I've already done that at great length.


Instead, I'd prefer to point out a few issues with the current Republican health care platform. Some Republicans, like Boehner, want to repeal the law in its entirety and replace it with something else. They haven't exactly been clear on the matter, from what I can tell. Mitt Romney's plan would basically just give block grants to states and let them make their own health care plans. I've said before, though, that Obamacare basically has a provision in it that allows states to do this, provided that their plans cover at least as many people and cost the same or less money to implement.


Among Congressional Republicans, some semblance of a plan has begun to take form. The two main things Republicans want to rely on for reform are to allow people to purchase insurance across state lines (i.e. to "shop around") and to rein in medical malpractice costs. Well, reining in malpractice costs is all well and good, but that's hardly a solution. As for allowing shopping across state lines, health-care economist Uwe Reinhardt of Princeton explains why this wouldn't work at all:
Reinhardt says the places where purchasing out-of-state insurance is most tempting—New York for example, where the market is heavily regulated and plans are community rated—are places where the cost of care itself is also expensive. A New Yorker might choose to purchase a plan from Texas, where the insurance market is less regulated and cheaper. But the New Yorker with a Texan plan still has to pay for New York–based health care. Allowing insurers to cover people in other states does nothing to bring down the cost of care itself. Texan insurers, unused to paying such high costs, have little incentive to cover expensive New York procedures, except if they can cherry-pick the young healthy people. That leaves an older, sicker, more expensive pool in the already pricey New York market.  "The bargains just won't be there. The profit margin on top of what providers charge is not that great. Insurers can't afford it," says Reinhardt. "Republicans claim to have all these solutions, but they're nonsolutions." 
Along those same lines, the Congressional Budget Office ran a study on what a plan like this would actually do for health care costs and the results are depressing, to say the least:
"[The plan] would reduce the price of individual health-insurance coverage for people expected to have relatively low health-care costs, while increasing the price of coverage for those expected to have relatively high health-care costs," CBO said. "Therefore, CBO expects that there would be an increase in the number of relatively healthy individuals, and a decrease in the number of individuals expected to have relatively high cost, who buy individual coverage." 
So basically, allowing shopping across state lines would lower costs for healthier people and increase health care costs for people who are sicker. Color me unimpressed. Needless to say, I'm still waiting to hear an actual Republican alternative to this health care plan, because what they've presented thus far is not a solution. Don't get me wrong, though, it's a great plan if you don't ever plan to be sick or poor. Reality often intervenes, though.


The other plan that some Republicans have put forth is that they want to repeal the individual mandate, but retain many of the law's more popular provisions, like forcing insurers to cover people with pre-existing conditions and allowing children to stay on their parents' health care plans until they're 26. They want to do this without maintaining the individual mandate. Now, there are a few ways you can try to get universal coverage without a mandate, like offering tax incentives imposing penalties for late enrollment, but they're all a lot more cumbersome and probably less effective than just using a mandate, which, again, was initially supported by Republicans. But back to my main point: there's no way to force insurers to cover pre-existing conditions without expanding the risk pool greatly. To do that, you need something like a mandate. If you don't have this expansion of the risk pool, you end up doing a charming little number called an insurance death spiral, which in this case would lead to premium increases of anywhere from 2.4 to 40 percent, depending on the estimate. Aren't market failures just peaches and cream?


Anyways, my ultimate point is that as of now, none of the Republican plans I've heard of would work as well as Obamacare. Some of them, like shopping across state lines, would probably be worse than the status quo. Obamacare isn't a perfect law by anyone's measure, but few laws ever are. However, it looks a great deal better than any of the alleged "plans" I've seen put forth by Republicans. Fully repealing it and replacing it with a demonstrably ineffective plan, then, would be an unacceptable result.

Thursday, May 17, 2012

Fool Me Once, Shame On You...Fool Me Twice...

Via Paul Krugman/ThinkProgress, I learn that former President Bush (the Younger) will be publishing a book on, wait for it, strategies for economic growth. Sadly, this isn't a joke. Say what you will about President Bush, but you can't with a straight face proclaim that his economic policies were book-worthy. He and the current Republican nominee apparently think so though, seeing as how both of their recipes for economic growth entail much of the same stuff.


Anyways, a few words about the economy during the Bush years. The centerpiece of Bush's economic platform would most likely be the 2001 and 2003 tax cuts, which were supposed to deliver robust growth. In this post, I'll look at how his numbers measure up against the postwar average. Just to be clear, these numbers are all measuring the period between the official end of the 2001 recession (March 2001) to December 2007, just prior to the financial crisis. 


I don't have time to go too in-depth about this stuff, but this chart basically sums up just about everything that needs to be said:


More reading on the topic for those interested here, here, and here.

David Leonhardt puts it quite well:



"I mean this as a serious question, not a rhetorical one: Given this history, why should we believe that the Bush tax cuts were pro-growth?
Is there good evidence the tax cuts persuaded more people to join the work force (because they would be able to keep more of their income)? Not really. The labor-force participation rate fell in the years after 2001 and has never again approached its record in the year 2000.
Is there evidence that the tax cuts led to a lot of entrepreneurship and innovation? Again, no. The rate at which start-up businesses created jobs fell during the past decade.
The theory for why tax cuts should create growth and jobs is a strong one. When people are allowed to keep more of each dollar they earn, they are likely to work longer and harder. The uncertainty is the magnitude of this effect. With everything else that’s happening in a $15 trillion economy, how large of an effect on growth do tax cuts have?"


Naturally, the usual caveats apply: government policies aren't the only thing going on, etc, etc. But the fact remains that even if you take only the good years of 2003-2007, Bush's tax policies didn't exactly deliver robust growth in employment. And now Mitt Romney is promising another round of tax cuts that, like Bush's, disproportionately benefit the wealthy.     Haven't they ever heard of the diminishing marginal utility of money? Sheesh. If they want a tax cut that would help people, make it benefit the people who actually need it. 

Anyways, I don't really know why Bush is trying to tout his administration's economic policies as some sort of a resounding success story, when there isn't a whole lot of evidence of  that. The same goes for Romney, who is touting similar economic plans--what about the period between 2001 and 2007 makes his campaign think such economic policies will work this time around? Oh, and this is of course in addition to the huge costs of extending permanent tax cuts.

It's just like our former President says..."fool me once, shame on...shame on you, fool me...cant...can't get fooled again."

I sure hope we can't get fooled again.

Tuesday, May 15, 2012

Of Term Papers and Comic Strips

Well, boys and girls, I'm very sorry to say this, but blog posting will be slightly limited in the next week or so. This is due in large part to my indentured servitude to Ohio State's economics department me having to write a big awful term paper. However, in case any of you are interested, the paper will be about the merits and potential drawbacks of the Affordable Care Act (aka Obamacare).  The irony here, of course, is that I willingly wrote the equivalent of six pages about it on my blog just for funsies, while here I am screaming bloody murder because I have to write about it for a grade. And so it goes. Whenever I happen to finish writing it I may very well upload it onto here, seeing as how my post on Obamacare was such a hit (relatively speaking). 


But anywho, here's some stuff I've been reading today that I found interesting:


Everybody do the confidence dance.

Thursday, May 10, 2012

The Economics of Same-Sex Marriage

President Obama made a semi-big splash yesterday when he finally announced his explicit support for same-sex marriage. I support same-sex marriage, so naturally, I was pleased. I never really saw a genuine reason not to support it (I don't buy the whole "it'll destroy the sanctity of marriage argument," straight couples already did that long ago). In any case, I'm not here to argue about the legal, moral, or philosophical aspects of it, I'm here to talk about the economic implications of it. I must give credit where credit is due: this post by Matt Yglesias about gay marriage today is actually what got me thinking about it, so I figured I'd try to dig a little bit deeper.

Data on this sort of thing are somewhat scarce, to say the least, but I've scrounged together what I could, and it looks encouraging. Anyways, I should probably explain my premise before delving into the numbers. The economy is depressed right now largely because of a lack of demand. As such, we need something to boost demand so that companies start hiring again, leading to a cycle of increasing demand, etc; I've talked about this before. Anyways, legalizing gay marriage would provide a bit of a boost in demand. Why, you may ask? Well, marriages are expensive, and you'd better believe that if it was legalized, same-sex couples across the nation would be flocking to get married. Like I said, there isn't a huge amount of data on this, but there have been some  studies done about the potential economic effects of it. 

A number studies done by UCLA's Williams Institute for Sexual Orientation Law and Public Policy all concluded that legalizing same-sex marriage would be beneficial for the economy. In California, the study estimated that the legalization would add $684 million to the economy over 3 years, while simultaneously boosting state revenues from sales taxes (though this particular budgetary effect would be temporary). Similarly, another study concluded that legalization of same-sex marriage would bring $1.2 million to Rhode Island's economy over 3 years. Yet another study examined the economic effects of legalization in Iowa (legalized same-sex marriage in 2009) and concluded that it has resulted in $12-13 million being added to Iowa's economy. For those who are curious, that whole three-year timeframe was used because the models UCLA used were based on data from Massachusetts, where the bulk of increased marriage spending took place within three years following legalization. 

Again, the data on this isn't as complete as I'd like, but still, it certainly is quite encouraging. Along the same lines, legalizing gay marriage would actually result in lower taxes for many same-sex couples, since they could file jointly instead of as individuals on their federal income tax returns. In most cases, this results in lower taxes. In fact, same-sex couples have to pay out as much as $6,000 more a year in income taxes than economically similar straight couples because they aren't allowed to file jointly. Legalizing same-sex marriage would effectively be a tax cut for them, and tax cuts are economically stimulative. 

To be sure, legalization would also result in increased costs for employers for things like health benefits, but this is going to happen anyway because of the Affordable Care Act. Moreover, it could incur higher costs for Federal programs that determine eligibility based on marital status, but again, this isn't what I'd call a bad thing from an equal rights standpoint. What's more, a CBO study from back in 2004 suggests that the costs and revenue changes in Federal budget would ultimately even out and actually result in a small net savings of $1 billion over a 10 year period. 

I'm not saying that legalizing gay marriage is a panacea for our economic ills. But the evidence shows that it probably would help to stimulate the economy. This is, of course, in addition to all of the other reasons it should be legal. Conservative opposition to this has always baffled me; if they're so motivated by the idea that everyone has the right to liberty and freedom, then why shouldn't same-sex couples have the freedom to get married like everyone else? How do they reconcile those two things? 

Somebody? Anybody?


Tuesday, May 8, 2012

The Private-Sector President: The Story of Barack "Job-killer" Obama

As you probably garnered from the title, I'm being sarcastic. But anyways, what am I on about now? Well, I just want to point out a few things that some people seem to miss when they criticize the President for being a private-sector-strangling job-killer.

First up, if Obama's policies were strangling corporations, then why are they experiencing record-breaking profits? The usual caveats apply to this, but still, food for thought.

Moving on to last Friday's jobs report. As of now, the U.S. economy has regained all of the private-sector jobs lost since Obama took office. Just to put a number on it, that means that we've regained 4.2 million private sector jobs under Obama's administration. Considering the total jobs lost in the Great Recession (June 2007-2009) was around 7.5 million jobs, we obviously have a ways to go, but that's not the point I'm trying to make right now (readers already know what I think needs to be done). Anyway, that's only private sector jobs, what about jobs in the public sector? Obama's big-government policies have led to a massive growth in our bureaucracy, right? Well, believe it or not, there have been 607,000 jobs lost in the public sector, largely from state and local cutbacks due to no federal aid. For you visual learners out there, here's a graph to illustrate it:


Socialism. That's it, right there. (The blip in mid-2010 is Census hiring)

How can this be, you might ask? The deficit is massive! Where's all that money going? Well, most of it is basically going to social safety net programs and unemployment insurance, which have grown because people are unemployed. Compounding this is the fact that since people are unemployed, there are a lot fewer people paying taxes. Just for good measure, throw in the war in Afghanistan and rising medical costs. Et voila, you've got yourself a massive deficit. 

But back to my main point. People like to complain that Obama is anti-business, or anti-private sector, but is he really? The vast majority of the jobs gained under him have been in the private sector, while most of the jobs lost under him have been government jobs. That's hardly what I'd call socialism. Historically speaking, public sector employment has always gone up after recent recessions, not down. For example, under Reagan, Bush I, and Bush II, government employment all went up:

If it quacks like a socialist... 

In fact, if more federal aid had been provided to states (which Republicans blocked), and public sector job growth had kept up with the historical trend shown above, we'd have something like 1.2-1.7 million more jobs today. These jobs wouldn't just be a bunch of bureaucratic desk jobs either, many would be for teachers, cops, firefighters, and the like. A quick calculation suggests that if we had that many more jobs right now, we'd be sitting around 7-7.5% unemployment. 

So Republicans are attacking the President because he's a "big-government socialist," when the data show that he is, in fact, quite the opposite. I guess they only like public sector job growth if they do it. And the great irony in all of this is that if he was more of a "big-government socialist" like Reagan and the Bushes, our recovery would be quite a bit better.

Sad, isn't it?



Thursday, May 3, 2012

Foreigners and Free Markets

I was watching This Week with George Stephanopolous from this past weekend, and I heard something that struck me as being particularly dim-witted. At one point in the discussion, one of Mitt Romney's campaign coordinators from California was complaining about the automaker bailouts. This wasn't surprising, given that Republicans frequently like to do this, but the way she criticized it was particularly amusing to me. A Democrat from Michigan, the former governor, I think, was talking about how the automaker rescue was a resounding success, to which the Romney campaigner said something to the effect of, "Chrysler is now owned by Fiat, how is that a success?!"


I've heard this criticism before, too. Newt Gingrich brought it up in one of the debates. I had hoped that that was just Newt being Newt, but I guess that isn't the case.


At first glance, I guess I could understand how this might be a criticism of the result of the bailouts. "Oh no, a once great American carmaker is now owned by Italians!" The horror, I know. But really, once you think about it, this criticism becomes utterly inane and hypocritical. Look at it this way: the chief Republican criticism of the bailouts is that the government should not have intervened in the private markets and that the carmakers should have gone through private bankruptcy proceedings. Ignoring the fact that it was highly unlikely that this could happen, given the frozen up credit markets in late 2008, let's take a quick step back. 


Republicans are criticizing that the government intervened in private markets, and at the same time, they're criticizing the fact that Chrysler was bought by Fiat. So government rescue bad, private buyouts...bad?? I don't follow their logic. This is how the free market works--companies buy large stakes in other companies. And that's exactly what happened with Fiat and Chrysler. Somehow it's being treated as if Fiat buying out Chrysler is worse than, say, the government deciding to hold its share of Chrysler stock instead of selling it. And it has been, I think, a resounding success; Chrysler has literally come back from the brink. 


Maybe there's some national pride at work here. Maybe it sort of bruises our egos to think that one of the "Big Three" American carmakers is now run by an Italian company. I don't personally care that much, because this is nothing new. Before Fiat, Chrysler was owned by Diamler, a German company. There's nothing that says an American car company can't be bought by a foreign one. Welcome to the free market. If Republicans like Gingrich and the Romney staffer want to criticize the bailouts on "free market principles" that's fine, but the least they could do is be consistent about it.

Tuesday, May 1, 2012

Corporate Tax Myths

At the beginning of April, Republicans made a big deal about how the United States had the new distinction of having the highest corporate tax rate in the world. This, they argued, was what was strangling corporations and preventing them from creating jobs. Senator John Barrasso (R-WY) even went so far as to write a column for Fox News entitled, "No Joke -- Obama's Corporate Tax Rates are Highest in the World." Never mind the fact that the corporate tax rate hasn't been changed in almost 20 years or anything, or the fact that Obama proposed cutting them. But I digress.

How true is this idea that the U.S. has the highest corporate tax rate in the world? Well, not very, as it turns out. The statutory rate, that is, the rate on paper, might be the highest at 35%, but the average effective rate, the rate that corporations actually pay, is much, much lower--in 2011 it was 12.1%, a 40-year low. For the sake of comparison, here's a few charts comparing the average corporate tax rate paid in industrialized countries between 2000-2005:

So, in reality, we're on the low end of the spectrum in terms of corporate tax burden, and the high statutory rate probably isn't causing us to be "uncompetitive." As the graph says, this is largely because our tax code is riddled with so many tax breaks, credits, loopholes, and offshore tax havens. Some of you might say that the record-low levels of corporate taxation are due to the recession. That's a fair point to try to make, but in reality, corporate profits have already surpassed their pre-Great Recession peaks and are breaking new records.

Now, that doesn't mean that we have an ideal corporate tax code--quite the contrary. Our current tax code is hugely distortionary, with different types of investment taxed at wildly different levels. For example, investment in petroleum and natural gas structures are taxed at around 9.2%, while computer equipment investment is taxed at a whopping 36.9%! Another great example of this is that equity-financed investment (when corporations sell stocks to pay for stuff) is taxed at an average of 36%, while debt-financed (that is, corporations sell debt bonds to pay for stuff) investment is taxed at an average of negative 6%. Just to be clear, that negative 6% means that when corporations sell bonds to pay for their investments, instead of paying taxes on their investment, we, as taxpayers, subsidize it. Needless to say, this is hugely distortionary.

What do I mean when I say something is distortionary? Well, when firms make investment decisions, they have to take all relevant costs and benefits into account. For example, taxes on certain behavior, like payroll taxes on work, change the relative cost of working versus that of, say, lazing around. Working, since it is taxed, gets you less happiness (money) than being lazy, so you may choose to work less. The degree to which this applies on an individual level is still hotly debated, but I don't want to get into that right now. Anyway, this study by the Center on Budget and Policy Priorities has a bit that explains it perfectly:
"If all forms of investment are taxed alike, the tax system will not affect decisions about what type of investment to undertake. That benefits the economy, since it means that investment dollars will be directed based on where they are expected to yield the highest return rather than on where they will receive the greatest tax benefit."
So basically, firms would then have a level playing field in terms of their tax burdens, so that they will make choices based on what is really best economically, not what is best based on their tax costs. So ultimately, I feel like the best policy choice for corporate taxes is to largely eliminate many of those loopholes, credits, and deductions, and to lower the actual top rate to something around 18-20%. As a result, we'd likely get more economically efficient decisions made by firms, while simultaneously raising some more revenue from corporate taxes. Oh, and before some of you ask, the evidence that slightly higher corporate tax rates will make it difficult for the U.S.  to "compete" in a global economy is pretty thin.


Anyways, back to my initial point: don't listen to people like John Barrasso; corporate taxes in the U.S. are actually pretty low. Is the system perfect? Hardly, but there's definitely room for improvement.