A NYT editorial on Japan's economy may have created false alarms by noting that its economy shrank at a 7.2 percent annual rate in the second quarter. This is true, but it is important to point out this plunge followed a first quarter in which it grew at a 6.0 percent annual rate. The net for the first two quarters is still negative, and the editorial is correct to raise warnings about the impact of sales tax increases on growth, but the picture is not nearly as dire as the second quarter figure taken in isolation suggests.
While the piece also reasonably calls for Japan to remove obstacles to women working and to advancing in the corporate hierarchy, it is worth noting that the country has already made substantial progress in this area. According to the OECD, the employment rate for prime age women (ages 25-54) is actually somewhat higher in Japan than in the United States, 71.4 percent in Japan compared to 69.9 percent in the United States.
Nope, I'm not kidding. We've seen a sharp slowdown in health care costs across the board over the last seven years. This has led the Congressional Budget Office to lower its deficit projections. In fact, the reductions in projected deficits due to this slowdown has been sharper than the reductions that we might have seen as a result of almost any politically plausible cut in benefits. But Robert Samuelson is not happy. He tells readers:
"No one truly grasps why Medicare spending has slowed so abruptly. A detailed CBO study threw cold water on many plausible explanations. What we don’t understand could easily reverse."
In other words, just because the problem seems to be going away doesn't mean we still shouldn't make cuts to benefits. One factor that may lead us to believe that lower cost growth can be maintained is that the United States still pays more than twice as much per person for its care with nothing to show for it in terms of outcomes. In fact, if our costs were the same as those in any other wealthy country we would be looking at huge budget surpluses, not deficits.
The difference in costs is attributable to the fact that our doctors, drug companies, and other providers get paid twice as much as their counterparts in other wealthy countries. Of course these are all very powerful lobbies so we more often hear about proposals to cut benefits for seniors rather than reduce the money being paid to providers.
As noted before, since Social Security payments come from a designated tax, there is no real way to get money for the rest of Samuelson's agenda unless we tax people for Social Security and then use the money for the military or other purposes. Such a scheme is not likely to be very popular and few politicians are willing to openly advocate it.
The NYT Magazine had a piece asking whether subprime mortgages are coming back. The gist of the argument is taken from an Urban Institute study arguing that if we had the same lending standards in place as in 2001, there would have been 1.2 million more purchase mortgages issued in 2012. It goes on to tell readers that reduced sales are holding back the housing market and the recovery. All of these claims are questionable.
First, asserting that 2001 is an appropriate base of comparison is rather dubious. House prices were already rising considerably faster than the rate of inflation, breaking with their long-term trend. Furthermore, the number of home sales had increased hugely from the mid-1990s, which were also years of relative prosperity. If the Urban Institute study had used the period 1993-1995 as its base, before the beginning of the bubble, it would have found few or no missing mortgages. It is a rather herioic assumption to pick a year of extraordinarily high home sales and treat this as the reference point for future policy.
The idea that we should expect more sales to be a big trigger for the economy is also dubious. The factor that determines building is house prices. House prices are already more than 20 percent above their trend levels. There is no reason that we should expect prices to go still higher or even that they would necessarily stay as high as they are now. One factor that is likely suppressing construction is the fact that vacancy rates are still above normal levels. It is understandable that builders would be reluctant to build new housing in a context where there are still many vacant units available.
Finally, it is worth noting that it is not clear that many people are being harmed by not being able to get a mortgage. As the piece notes, the benefits of homeownership are often overstated. With prices already at historically high levels, homebuyers have a substantial risk of price declines and little reason to expect that the price of their home will rise by more than the rate of inflation.
Furthermore, there are large transactions costs associated with buying and selling a home, with the combined buying and selling costs equal to roughly 10 percent of the purchase price. This means that people who move within 3-4 years of buying a home will likely lose on the deal. This is an especially important point if the marginal homebuyers are younger people who are likely to have less stable family and employment situations.
The latter point is especially important in a context where much of the elite is demanding that the Fed raise interest rates to slow job growth. If the labor market does not improve much further, then it is likely that many people will find themselves in a situation where they have to move to get a job. That is not a good situation for a homeowner to be in.
That's not exactly news, but Neil Irwin does a nice job summarizing the data in the Fed's new Survey of Consumer Finance. The item that many may find surprising is that median wealth was lower in 2013 than it was in 2010 is spite of the boom in the stock market over this period. As Irwin explains, this is due to the fact that most middle income families own little or no stock, even indirectly through mutual funds in retirement accounts.
For people near the middle of the income distribution their wealth is their house. In 2010 house prices were still headed downward. The first-time homebuyers tax credit had temporarily pushed up prices. (The temporary price rise allowed banks and private mortgage pools to have loans paid off through sales or refinancing, almost all of which was done with government guaranteed loans.) After it ended in the spring of 2010, prices resumed their plunge, especially for homes in the bottom segment of the market.
Price began to turn around in 2013, but adjusting for inflation they were still about even with where they were in 2010. In many areas the prices of more moderate priced homes were still well below their 2010 levels. This would explain why wealth for families near the middle of the income distribution would be below its 2010 level.
The NYT tolds readers that Google is the victim of a European backlash against U.S. technological dominance. In addition to anti-trust and privacy issues being raised with regard to Google, the piece also notes that Apple and Amazon are being investigated for their tax practices, taxi drivers have protested against Uber, and Facebook is being investigated for anti-trust violations.
It's not clear that any of this amounts to an anti-American backlash. Apple and Amazon constantly face tax issues in the United States as well. Taxi drivers in the United States have protested Uber. And it would not be surprising if both Facebook and Google face anti-trust issues here as well.
But the last two paragraphs go furthest to undermine the European backlash story:
"Then there is Microsoft, Google’s longtime nemesis, which spends three times as much in Europe on lobbying and similar efforts. ICOMP, a Microsoft-backed group, has long targeted Google.
"'Google is clearly in the cross hairs,' said David Wood, a London-based partner at Gibson, Dunn, one of Microsoft’s law firms, and legal counsel at ICOMP. 'A lot of the aura has faded, and the shine has come off, and people don’t think they’re the good guy anymore.'"
Companies often try to use government regulation to hamper their competitors. It is not clear that anything about the actions against Google reflect the "European backlash" promised in the headline as opposed to the sort of opposition that any large company would likely face regardless of the country in which its headquarters are located.
The proponents of fracking have made many big claims about its economic benefits. In addition to lower cost electricity, we are also supposed to get energy independence and a boom in jobs. The NYT picked up this theme with an article that touted an "energy boom" that is lifting the heartland. The piece claims that fracking related jobs have revitalized Ohio's economy with Youngstown being at the center of the action.
The piece tells readers:
"Here in Ohio, in an arc stretching south from Youngstown past Canton and into the rural parts of the state where much of the natural gas is being drawn from shale deep underground, entire sectors like manufacturing, hotels, real estate and even law are being reshaped. A series of recent economic indicators, including factory hiring, shows momentum building nationally in the manufacturing sector."
"New energy production is 'a real game-changer in terms of the U.S. economy,' said Katy George, who leads the global manufacturing practice at McKinsey & Company, the consulting firm. 'It also creates an opportunity for regions of the country to renew themselves.'"
That sounds really impressive. Unfortunately the data do not seem to agree. The Bureau of Labor Statistics shows that manufacturing employment in Youngstown is still down by more than 12 percent from its pre-recession level as shown in the figure below. There is a comparable story with Canton.
Manufacturing Employment in Youngstown
Source: Bureau of Labor Statistics.
While fracking jobs may have helped bring these areas up from the troughs they experienced at the bottom of the downturn, employment in both metropolitan areas is still far below 2007 levels. No one thought either city was booming at that time. In short, the data do not seem consistent with the story told in this article.
The NYT gave readers only part of the story in an article on the Democratic primary race for governor of Rhode Island. It notes that state Treasurer Gina M. Raimondo is currently the frontrunner.
It then told readers in reference to Raimondo:
"The 'tough choice' was her overhaul of the state’s pension system in 2011. She marshaled the state’s Democratic political establishment to increase the retirement age, cut benefits and suspend annual cost-of-living adjustments for state employees until the finances of the underfunded system improved. The move was meant to save $4 billion over two decades and slow state property tax increases. ...
"The pension overhaul is now at the center of a primary race for governor that has become one of the most divisive in the country."
Raimondo did not just cut benefits. She also invested a large portion of the state pension fund with hedge funds and private equity companies under terms that were not disclosed to the public. (Raimondo formerly worked with a hedge fund.) The state's major newspaper has sued (unsuccessfully) to force disclosure of this information.
However the issue is not just cuts to the benefits promised public sector workers. There is also a question of whether the state's pension funds are being used to enrich Wall Street.
Robert Samuelson apparently believes it would have based on his column today calling for more military spending. There are a few points worth noting about this piece.
First Samuelson compares current spending at 3.4 percent to the post-World War II average of 5.5 percent of GDP. For most of the post-war period we were engaged in a military build-up to counter a rival super-power (the Soviet Union). The average also includes long periods of actual war (Korea, Vietnam, Iraq I and II, and Afghanistan). It should not be surprising that at a time when the country is not nearly as engaged in armed conflicts, and faces no major foe, it would spend less on its military.
Samuelson apparently wants the money for the military to come at least in part from spending on seniors, commenting at the end: "Democrats who will cut almost anything except retirement spending."
The cuts to retirement spending that Samuelson wants are problematic. Social Security taxes are designated for Social Security. Samuelson might not have a problem taxing people for Social Security and then using the money for the military, but the public might have a problem with that idea, as would the people who depend on their votes.
There are substantial potential savings in Medicare, but this is because the United States pays more than twice as much per person for its health care as other wealthy countries. However getting savings would require cutting the incomes of doctors, drug companies, and medical equipment suppliers. These are all very powerful lobbies which Congress is reluctant to challenge. While Samuelson implies that the issue is seniors getting benefits that are too generous, the cost issue to the government is that we pay too much for the same benefits that people get in all wealthy countries.
I'm a big fan of nature and hiking, but that number doesn't sound quite right to me. The Washington Post had an article on the recreation business in which it told readers that the country spends $646 billion a year on outdoor recreation and related spending. This figures comes to a bit more than $2,000 per person. If we assume that half of the public doesn't really do anything that fits the bill, then this means the other half spend $4,000 per person per year on outdoor recreation. That comes to $16,000 per year for a family of four.
Let's see, you can a pretty nice tent for a few hundred dollars, hiking boots can cost $150-$200, a good sleeping bag in the same range. That could get us to $700, but of course you don't buy these things every year. If you assume they last an average of 3-4 years, these items will only get you about $200 per year, less than one twentieth of the way to our $4,000 target.
According to the article, the $646 billion figure came from an industry group. The link does not go to a report that could explain how they got the number, but rather a map showing a state by state breakdown. It's not clear how the industry group came up with its number, but it's virtually certain they included many items that most of us would not consider spending on outdoor recreation. The Post should be a bit more careful in uncritically accepting numbers from industry groups.
Robert Salzberg points me to a link later in the piece that goes to the study itself. The study shows that the bulk of its $646 billion in spending is based on food, entertainment, lodging, and travel related expenses. This presumably means that if someone flies across country to visit family members and also goes to a national park then the study would count the air fare and the money spent on lodging throughout their trip. The study does not describe the methodology in full, but it does give a non-working URL as the location of a technical report.
The Washington Post article on the August job report, which showed the economy adding 142,000 jobs in August, told readers:
"Economists, however, were quick to caution that the weak jobs number is an outlier at a time of several other stronger measures of economic activity, including auto sales — which soared in August — and exports. Markets were little-changed on the news and ended the day in positive territory.
'I don’t believe the numbers,' said Tim Hopper, chief economist at TIAA-CREF. 'Not only are they very weak, they just don’t match anything else that’s in the market right now.'"
Actually, the numbers match the market very well. The economy grew at a 1.1 percent annual rate in the first half of the year. Faster growth in the second half of the year might bring the rate for the whole year to 2.0 percent. If we assume that productivity growth is 1.5 percent, this would imply an increase in the demand for labor of 0.5 percent. That translates into 700,000 jobs for the year or roughly 60,000 a month.
Even if we assume productivity growth of just 1.0 percent (this is well below the rate we saw even in the slowdown years from 1973-1995), the implied rate of job creation would just be 1.4 million a year, or 120,000 a month.
The article gives no explanation of why any economist would expect a much faster rate of job growth when the economy is growing so slowly.
Federal Reserve Board Chair Janet Yellen is a serious scholar of economics. That means that she wants to hear a range of arguments and consider them carefully. Unfortunately we don't live in a political world where such concern with the truth is the norm.
For this reason it is unfortunate that Yellen speculated in her Jackson Hole speech last month that one reason for weak wage growth could be pent-up real wage declines. The argument is that if we think that firms would have lowered real wages, but could not because they did not want to impose nominal wage cuts, then there should be a number of workers whose real wages are higher than is justified by their productivity.
The implication of this story is that when labor markets tighten, these workers will initially see no nominal increase in wages since it will take some time for their real wages to fall to a level in line with productivity. But then we get a story where we end this pent-up wage decline and then these workers would again see nominal wage growth. This is then presented as a kicker to inflation.
It's reasonable for Yellen to consider such issues, but naturally the inflation hawks are seeing this story as yet another argument for slamming down brakes on the economy and job growth. Most of us would believe as a fairly simple story that in a tighter labor market there is more upward pressure on wages and therefore somewhat more risk of inflation. But how is this changed by the pent-up wage decline story?
What percent of the workforce do we think can be in this boat, 5 percent, 10 percent, 20 percent? It seems hard to imagine it would be much over 10 percent of the workforce that could conceivably be in this situation, especially when we consider that 4 million workers, roughly 3 percent of the workforce, leave their jobs every month.
But let's say that we have 10 percent of the workforce who have some degree of pent-up wage declines. The issue is what happens when this ends? The first thing we have to remember is that the pent-up declines won't end all at once. Workers would have different degrees of pent-up wage declines.
Let's say that the pent-up declines end over 3 years. This means that in each of those three years, if we start from our 10 percent number, 3.3 percent of the workforce suddenly goes from seing zero nominal wage increases to seeing 2.0 percent pay hikes in order to have their wages keep pace with inflation. And this raises the overall rate of inflation by 0.07 percentage points. Get out the wheelbarrows of money, hyperinflation is just around the corner.
A useful NYT article on the latest moves by the European Central Bank's to try to prop up the euro zone economy included a comment near the end:
"Thursday’s moves signaled that at least one European institution is doing all it can to avert the threat of deflation — the pernicious downward spiral of prices that often leads to high unemployment."
Actually there is no basis for the fears of this sort of downward spiral. As the piece correctly points out, the euro zone economy is already suffering from very low inflation. With many long-term loans contracted with the expectation of much higher rates of inflation, the current near zero rate of inflation is imposing serious burdens on debtors. The low rate of inflation also means a higher real interest rate for firms considering investments for the future.
Crossing zero from low rates of inflation to low rates of deflation doesn't change this story. Having a lower rate of inflation makes matters worse, but there is no particular importance to crossing zero. (At low rates of inflation, the prices of many goods and services are already falling.)
There could be a problem if there was a downward spiral with deflation leading to more unemployment, leading to more deflation, but we have not seen anything like this in a wealthy country since the Great Depression. Even Japan never really saw anything along these lines. It's inflation rate fell to -1.0 percent in 1999, was -0.7 percent in 2000, and peaked at -1.5 percent in 2001. It became positive again in 2004 and remained positive, with the exception of 2005 until the economic crisis in 2009.
There was no tendency for the rate of deflation to continue to get more rapid during this period. In other words, there is zero reason to think that anything qualitatively different happens to an economy if the inflation rate turns negative, except that in a weak economy a lower inflation rate is worse than a higher one.
That's the question millions are asking after seeing the NYT article on the debate between California governor Jerry Brown and Neel T. Kaskari. The piece told readers:
"Again and again, Mr. Kashkari criticized the ambitious high-speed rail project from San Francisco to Los Angeles that Mr. Brown has pushed even as it has lost popularity with voters and some lawmakers, and even as Republicans in Washington have said they would refuse to fund it."
Other than giving us the NYT's assessment of the project it is not clear what information the word "ambitious" provides to readers.
An interview on Morning Edition with Edward Lucas, senior editor at The Economist and author of The New Cold War, likely mislead listeners about the path of the Russian economy and corruption under President Putin's period in power. Lucas implied that Russians are likely to be very unhappy about the current state of the economy and public services and angered over the extent of corruption in the country.
While undoubtedly there is much corruption in Russia under Putin, corruption did not begin with Putin. According to the World Bank (Table 4.3A), Russia got $8.3 billion for all the assets it privatized in the 1990s. This was a period in which it sold off the vast majority of the industry built up during the Soviet years, as well as much of its oil and natural resources. By comparison, Snapchat currently has a market value of $10 billion. During this period well-connected people were able to become billionaires by buying assets at prices far below the market level.
This was also a period in which Russia's economy collapsed. According to data from the International Monetary Fund, Russia's economy shrank by almost 30 percent during President Yeltsin's tenure. (This is about six times the drop in GDP the U.S. saw in the Great Recession.) Since Putin came to power in 1999 it has more than doubled in size. This economic performance likely explains much of the support shown for Putin in public opinion polls.
Source: International Monetary Fund.
Note: Name of president corrected -- the decline took place under Yeltsin, not Putin. Thanks Daniel. Also, Putin came to power in 1999, not 1998 as previously written.
The Washington Post thinks it has found a fatal flaw in the argument that fast food workers should have higher wages:
"The problem: Fast food is a low-profit margin business. How low? According to Yahoo Finance, 2.4 percent. Just look at the headline: 'Fast-Food Chains Aren’t as Rich as Protesters Think.'"
It is likely that most of the people organizing the push for higher wages in the industry are fully aware of "the problem." If workers got higher wages they would presumably be offset to some extent by lower profits, lower pay for top management, increases in productivity, but there would also be some increase in higher prices.
This would reverse a process whereby fast food prices would have dropped relative to the price of other goods as the wages of workers in the industry fell relative to the economy-wide average. There is no obvious "problem" with this reversal. It essentially means that those on the bottom would enjoy higher real wages and living standards, while those on top would see a relative decline in their living standards. It would only be a relative decline, except for those at the very top, since if the economy is growing normally, higher paid workers could still get a share of productivity gains.
Wonkblog had a post telling readers that the U.S. labor market is doing better in the recovery than the labor market in most other wealthy countries. While this is true if we look at unemployment rates, is far less clear if the focus is employment rates (EPOP), the percentage of the population who is working.
This is true even we control for demographics. The EPOP for prime age men (ages 25-54) in the United States is still down 3.7 percentage points from its pre-recession level. By comparison, in Japan the EPOP for prime age men is up by 2.0 percentage points and in Germany it's up by 3.3 percentage points.
France has seen a drop in its EPOP from pre-recession levels, but only 0.7 percentage points -- still much better than the U.S. In fact, with a drop of in its EPOP for prime age men of 2.7 percentage points, the euro zone as a whole is doing better than the United States, in spite of the inclusion of crisis countries like Spain and Greece with double-digit drops in EPOPS.
In short, the case that the U.S. labor market has fared better than the labor markets in most other wealthy countries is much weaker than this piece indicates.
Thanks to Seth Ackerman for calling this one to my attention.
Joe Nocera had a good piece discussing the plight of factory workers in the United States subjected to low cost competition from China and other developing countries. He argues that the government has done too little to help the workers and the communities that have suffered from such competition. However his prescription, that workers should get more skills, is somewhat misleading.
While it is always better to have a more skilled workforce, one of the main reasons that more skilled workers have done better in the era of globalization is that they have been largely protected from the same sort of competition faced by less-educated workers. While trade agreements were explicitly designed to put manufacturing workers in direct competition with the low-paid workers in the developing world, there has been no similar effort to subject our doctors, dentists, lawyers and other highly paid professionals to the same sort of competition.
Trade agreements could have focused on reducing barriers that make it difficult for qualified professionals from the developing world to work in the United States. For example, we could have fully transparent sets of standards to become a doctor or lawyer in the United States, with tests administered in other countries (by U.S. certified test givers). Anyone from Mexico, India, or China who passed these tests would have the same ability to work in the United States as someone who grew up in Kansas.
The potential benefits to consumers and the economy would run into the hundreds of billions of dollars annually. And this would have the effect of shifting income downward rather than upward. (Yes folks, we can design a mechanism to reimburse developing countries for the professionals they educated who come here, which would ensure they gain as well.)
Trade agreements did not put professionals into competition because they are a powerful enough lobby to block such actions. However it is important to be clear in our understanding. It was not "globalization" that redistributed income upward. It was a pattern of trade that was intended to put downward pressure on the wages of the bulk of the population while protecting those at the top.
Just a few quick points - doctors and lawyers (especially doctors) are not members of the middle class in the normal usage of the term. About 25 percent of doctors are in the one percent and the vast majority are in the top two percent. If the rest of us are going to get more, they must be among the group that gets less.
Second, lower wages for manufacturing workers have translated into lower prices. Part of it has gone to profits, but shirts and cars are cheaper than they would be if we didn't have low-paid labor doing much of the work.
Finally, there is no way that a lower valued dollar is going to bring us to developing country living standards as fans of arithmetic everywhere can verify. Imports are equal to roughly 20 percent of our GDP. Suppose a 30 percent drop in the dollar leads to a 20 percent rise in import prices (both very large changes). This implies that we can buy 4 percent less than we did previously. That still leaves us far ahead of Mexico and China. And for debt-phobia fans, we are saving this amount today by borrowing.
That's what a Reuters story on the NYT website said Japanese leaders are troubled by. The piece told readers:
"Policymakers are also pledging to draft a vision of how to keep Japan's ageing population from shrinking into oblivion, holding the line at 100 million in 2060, a 20 percent drop from now."
And what bad thing happens if Japan continues to become a less crowded island through the rest of the century and beyond, more room at the beach and less pollution?
Austin Frakt had an interesting piece in the Upshot section of the NYT reporting research finding that show substantial reduction in health care premiums when there is more competition in the market. The implication is that prices could fall substantially in the exchanges where there are a small numbers of insurers and especially in states like New Hampshire or West Virginia where there is only a single insurer in the market.
At the end of the piece Frakt notes that more insurers appear to be entering the exchanges in 2015 than in their first year of operation. He also suggests some policies that the federal government could pursue to encourage more competition. In addition to the policies Frakt listed, in principle the federal government could also allow Medicare and/or Medicaid to offer plans for purchase in the market in areas with less than a specified number of insurers. This should ensure people the option to have a reasonably priced plan.
At the start of the piece Frakt refers to President Obama's pledge that his health care plan would lower family premiums by as much as $2,500 a year. It is worth noting that per person health care costs in the United States in 2014 are around 15 percent less than had been projected in 2008. This would be a savings in the neighborhood of more than $2,000 a year for a typical family plan. Clearly not all of these savings can be attributed to the Affordable Care Act, but people are paying considerably less for health care in 2014 than had been expected in 2008.
Folks who are not DC insiders might think it would take courage to stand up to the rich people who have done so well (and caused so much harm) over the last three decades. Or, we might think it would take courage to standup to nonsense about budget deficits to point out that we need larger deficits now to create the demand necessary to bring the economy back to full employment. (Yes, we all love the private sector, but the private sector doesn't create jobs for love.) Taking those positions might seem to require courage, but in DC insider circles real courage is demanding that we cut Social Security and Medicare; and that is independent of any of the facts.
Hence we see Dana Milbank telling us that new CBO projections, showing that deficits will be lower over the next decade than in the prior set of projections,"threw cold water on my tranquility." He went on to say the new report was "downright bone-chilling" and that the "top-line conclusions were grim enough, if not catastrophic." It's scary to think what his reaction would have been if the new projections showed a worsening picture.
But his real horror story is that the debt to GDP ratio will be over 77 percent in a decade. Wow, and this means what? Milbank was on vacation so he probably missed the collapse of the housing bubble and the worst downturn since the Great Depression. That really was (and is) bone-chilling and catastrophic, but apparently not the sort of thing that worries DC insider types.
Just for purposes of comparison, just about every country in the euro zone has debt to GDP ratios well above 77 percent and many are borrowing at lower interest rates than the United States. Japan has a debt to GDP ratio more than three times as high and borrows long-term at less than a one percent interest rate. So, these debt numbers might make good scare stories for the DC insider crowd, but they have nothing to do with real world economics.
There are of course things we should be worried about, like continued slow growth and high unemployment, but the best remedy for that would be a higher budget deficit or a lower valued dollar that would reduce the trade deficit. We should also worry about the fact that we pay twice as much for our health care per person than people in other wealthy countries with nothing to show for it in terms of outcomes. If we fixed health care that would also take care of the budget deficit, shifting the projected deficits to surpluses.
But fixing health care would mean taking money away from drug companies, doctors, medical equipment suppliers and insurers. The Post doesn't pay people to push taking away money from those interest groups,, just seniors.
The exchange I had with Jared Bernstein and subsequent comments by others have led to me do more thinking on the corporate income tax. First, just to respond to various notes and comments, I was not all upset that Jared and I disagreed. Jared is an old friend and a very good economist. I value his views, which is why I write books with him. I learned from his comments and I appreciate his concern for losing revenue even if it doesn't over-ride my my reasons for thinking that eliminating the corporate income tax (CIT) is a good idea.
I think the most useful way to think of the CIT is an optional levy placed on corporate income. We tell corporations that they have to pay 35 percent of their income in taxes to the government. It's optional in the sense that we allow them to cut this amount by two-thirds, if they instead pay one-third of this levy to Wall Street investment banks, accounting firms, and tax lawyers. (Using 2014 numbers nominal corporate tax liability would be roughly 6 percent of GDP or $1,050 billion, with actual tax collections around 2.0 percent of GDP or $350 billion.) This is roughly how the tax boils down, with the Government Accountability Office estimating that companies pay about 13.0 percent of their income in taxes to the government, compared to the 35 percent nominal tax rate. This means that 22 percentage points of the profits, that in principle are owed as taxes, are escaping taxation by the government.
In fairness, I don't know how much corporate America is actually paying to escape its taxes. (Someone have a good study to send me?) Essentially, I am just assuming that they spend half of their tax savings on avoidance costs.
These avoidance costs have real economic consequences. We are paying people lots of money to do activities that have zero value to the economy even though they are hugely valuable to their corporate employers. The people working on tax scams at the major accounting firms, or working out inversion mergers at Goldman Sachs, or creating new tax shelters at private equity companies could all be employed doing something productive. This is like giving companies a tax credit to pay people to dig holes and fill them up again. The difference is that these are highly educated people and they are getting paid really big bucks for the pointless hole-digging.