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Trade Deals Do the International Equivalent of Banning State Tax Incentives Print
Tuesday, 16 September 2014 04:58

Emily Badger in Wonkblog had an interesting discussion of the issues around state tax incentives to lure or keep businesses. The piece notes that many economists believe that it would be good to ban these incentives since it ends up being a zero sum game. It then includes many comments implying that any bans would be difficult to enforce.

While it is certainly true that enforcement would be difficult, it is worth noting that parallel issues arise in international trade all the time. A major goal of many trade deals is to prevent countries from subsidizing their own industries to give them an advantage in international competition. There are often major disputes over what constitutes a subsidy. For example, Boeing and Airbus frequently end up in suits before the WTO over allegations of unfair subsidies. Nonetheless, few people dispute the desirability of trade agreements attempt to restrict subsidies.

The situation at the state level is comparable. There will always be grey areas as states try to push the limits of acceptable subsidies, but that doesn't mean it is not desirable to outlaw the general practice. Just as with international trade, such an agreement can be expected to substantially reduce the amount of money committed to firm specific subsidies.

NYT Does Mind Reading on Rhode Island Gubernatorial Candidate Print
Monday, 15 September 2014 04:09

The NYT engaged in some mind reading on Gina Raimondo, the Democratic nominee for governor of Rhode Island. In reference to Raimondo it told readers:

"Growing up in a Democratic household, she believed in activist government. (Her father had gone to college on the G.I. Bill.) She also thought pension benefits needed to be curbed to save other government services, not to mention the pension system itself."

It's great that the NYT is able to tell us what Raimondo actually believes about activist government and cutting pension benefits. Most newspapers would just have to report what Raimondo said about her views.

As long as the NYT was doing mind reading it might have been helpful if it told readers whether Raimondo thinks that Rhode Island can break contracts with anyone or whether she only thinks the state has the right to break contracts with its workers. It could also have told readers whether she believes the state has the obligation to respect the law in other areas.

For example, if she wants to provide government services but doesn't want to raise the taxes to pay for them, does she think the state should just seize property to cover the cost, and if so, whose property?

Instead of spending so much effort on mind reading, it might have been more useful to readers if the paper had spent more time examining the specifics of Raimondo's pension proposal. In addition to taking back part of the money the state had committed to pay workers, Raimondo's pension plan also will mean giving hundreds of millions of dollars in fees to Wall Street hedge funds. These fees could easily reduce the pension fund's return by more than a full percentage point.


Ensuring that Airbnb Renters Comply With the Law: It's Simple! Print
Sunday, 14 September 2014 07:09

The Washington Post's Wonkblog had an interesting piece on efforts by San Francisco and other cities to set up rules for short-term rental services like Airbnb. At one point it tells readers:

"critics of any new regulation will likely argue that it imposes onerous bureaucracy on would-be hosts, while setting up a complex system that the city can't maintain."

Actually, it should be fairly easy to enforce regulations by simply holding Airbnb responsible for people who rent through its service. This would leave the enforcement problem with Airbnb. If Airbnb lacks the competence to ensure that its rental units comply with the law, then it will replaced by a more competent business. That is the way markets are supposed to work.

It Really Wasn't Hard to See the Dangers Posed by the Housing Bubble Print
Saturday, 13 September 2014 04:36

At its peak in 2006, the housing bubble had caused nationwide house prices to rise more than 70 percent above their trend level. This run-up occurred in spite of the fact that rents had not outpaced inflation and there was a record nationwide vacancy rate.

The dangers of the bubble also should have been clear. Residential construction peaked at almost 6.5 percent of GDP compared to long period average of close to 4.0 percent. The housing wealth effect had led to a consumption boom that pushed the saving rate to near zero.

Also, the flood of dubious loans was hardly a secret. The National Association of Realtors reported that nearly half of first-time homebuyers had put down zero or less on their homes in 2005. The spread of NINJA (no income, no job, and no assets) loans was a common joke in the industry.

These points are worth noting in reference to an article discussing the Fed's efforts to increase its ability to detect dangerous asset bubbles. An asset that actually poses a major threat to the economy is not hard to find. It kind of stands out, sort of like an invasion by a foreign army. The failure of the Fed to recognize the housing bubble and the dangers it posed was due to an extraordinary level of incompetence, not the inherent difficulty of the mission.

Manufacturing Employment Is Down Everywhere, Not Just Michigan Print
Saturday, 13 September 2014 04:23

A NYT article reporting on the economic and political situation in Michigan noted that in spite of the improvement in its economy since the recession, manufacturing employment is still far below prior peaks. It told readers:

"Manufacturing has come back, with payrolls rising to 567,900 this June from 440,600 in June 2009, bringing manufacturing payrolls back to July 2008 levels, but short of the peak of 906,900 in September 1999."

Actually Michigan's experience is not very different from the situation for the country as a whole. Manufacturing employment hit 17,640,000 in 1998. In the most recent data it was at 12,160,000 a drop of 31.2 percent. The 37.4 percent drop in Michigan is obviously larger, but not qualitatively different. The drop did matter more for Michigan because manufacturing was a larger share of employment in Michigan than in the nation as a whole.

Skills Gap In Manufacturing Seems to Be Primarily at the Top Print
Friday, 12 September 2014 07:25

The Wall Street Journal devoted a major article to the efforts by President Obama and several governors to address the skills gap. According to the piece, employers in manufacturing can't hire workers with the right skills. If employers can't get enough workers then we would expect to see wages rising in manufacturing.

They aren't. Over the last year the average hourly wage rose by just 2.1 percent, only a little higher than the inflation rate and slightly less than the average for all workers. This follows several years where wages in manufacturing rose less than the economy-wide average.

              Change in Average Hourly Wage in Manufacturing Over Prior 12 Months



                                                    Source: Bureau of Labor Statistics.

There are workers who have the skills employers need. They work for their competitors. If an employer wants to hire people she can get them away from competitors by offering a higher wage. It seems that employers in the manufacturing sector may need this simple lesson in market economic to solve their skills shortage problem.

State and Local Pension Funds Face a Shortfall Equal to 0.3 Percent of GDP Print
Friday, 12 September 2014 05:19

Are you scared? How will we pay for that? This is the context that was missing from the discussion of a bill from Utah Senator Orin Hatch which would encourage state and local governments to replace traditional defined benefit pension plans with cash balance type plans tied to an annuity which would be run by the insurance industry.

The piece told readers:

"For local governments and states, the unfunded liabilities are huge, ranging anywhere from $1.4 trillion to more than $4 trillion, depending on the assumptions plugged in by actuaries."

These shortfalls are calculated over the pension plans' thirty year planning horizon, a period in which the discounted value of GDP will be in the neighborhood of $500 trillion. It is unlikely that many readers have a clear sense of the projected size of the economy over this period, so they have little basis for assessing these projected shortfalls. If they did know the projected size of the economy they may disagree with the characterization of the shortfall as "huge." (The difference between the two numbers is based on whether the pension funds calculate their shortfalls assuming that their assets earn their projected rate of return or whether they calculate their shortfall assuming their assets earn the return available on a completely safe asset like government bonds.)

There are a few other points worth noting about this picture. First, the shortfalls are likely to be considerably less next year. Most pensions calculate their current assets using a five year average. Next year 2014 will replace 2009. Unless the stock market plunges in the last three and a half months of the year, this change will lead to a substantial improvement in the funding situation of most pensions.

The second point is that the averages conceal sharp divergences across funds. Most pension funds are reasonably well-funded, with some having funding ratios of over 100 percent. There are a number of outliers, like Illinois, Ohio, and New Jersey, that have badly underfunded plans. This is not due to their investment patterns, but rather their repeated failure to make required contributions.

Finally, it is worth noting that turning over the pension plan to insurance companies will almost certainly raise the fees collected by the financial industry. This means that the same amount of taxpayer dollars will translate into lower benefits on average for retirees. That's obviously good news for the insurance industry, but bad news for taxpayers and public sector workers.

There is one possible policy justification for throwing this money in the garbage. If an insurance company was an intermediary, it might be more difficult for politicians like New Jersey Governor Chris Christie to avoid making required contributions. As it stands now, the refusal to make these contributions appears to be part of Mr. Christie's political shtick, allowing him to portray himself as a tough guy standing up to the state's workers.

If there was an insurance company acting as an intermediary then perhaps the situation may be clearer to the public. Mr. Christie is simply trying to avoid paying bills that he has accrued, effectively stealing money from the state's workers. 


Are Corporate Inversions Shareholder Capitalism or Wall Street Capitalism? Print
Friday, 12 September 2014 04:27

Allan Sloan raises an important point about winners and losers from corporate inversions, the process through which a U.S. company arranges to be taken over by a foreign company to lower its tax bill. He points out that many shareholders will be hit with a large individual tax bill because as an accounting matter they will have sold their stock and thereby realized a capital gain.

This isn't a question of shedding tears for these shareholders, who will mostly be in the top tenth or even the top one percent of the income distribution. The point is that this tax scam is not in their interest. While the company may benefit over time from paying lower corporate taxes, this is unlikely to result in a net gain for those current shareholders who have to pay capital gains taxes because of the inversion.

Sloan points out that the big gainers are the financial firms that arrange the deals, who can count on hundreds of millions in fees from a major deal. The corporate insiders (top management) may also stand to gain since they are unlikely to be faced with the problem of having to pay taxes on large amounts of unrealized capital gains.

If the point is to change practices such as corporate inversions, rather than just complain about them, it is important to recognize these distinctions. The financial sector and the corporate insiders are incredibly powerful interest groups. If some number of wealthy shareholders can be brought into a coalition to restrict this sort of tax gaming, it would have a far greater chance of succeeding. (The same story applies to bloated CEO pay, which most immediately is money out of shareholders' pockets.)

Fiery Comebacks Ain't Want They Used to Be Print
Friday, 12 September 2014 04:04

When countries went into recessions in the past they usually came out with a year or two of rapid growth that more than made up the ground lost in the recession and then resumed a normal growth path until the next recession. That hasn't been the case in any major wealthy country following the 2008 downturn, although some countries, notably those in the euro zone, have done markedly worse than others.

Perhaps it is this comparison to the weak performance of the euro zone countries that led a piece in the NYT Dealbook section to tell readers:

"Britons also see a Continent that is plagued by deflation and stagnation while their economy has staged a fiery comeback from the financial crisis."

According to the I.M.F. the U.K. economy will be 1.5 percent larger in 2014 than it was in 2007. This would be equal to a bit more than a half year of growth in normal times.

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                               Source: International Monetary Fund.

It is also worth noting that this piece seems to imply that the loss of part of its financial sector would be a big hit to the U.K. economy. This is not clear. Economists usually assume that economies tend to be at their full employment level of output in the long-run. If this is the case, then the loss of banks in the U.K. and/or Scotland would lead the people currently employed in finance to move to other sectors where their labor could be employed productively.

Washington Post on Public Pensions: People Should Refuse to Pay for Their Washington Post Ads Print
Thursday, 11 September 2014 07:14

The Washington Post thinks its fantastic that Rhode Island broke its contract with its workers. It applauded State Treasurer and now Democratic gubernatorial nominee Gina Raimondo for not only cutting pension benefits for new hires and younger workers, but also:

"suspending annual cost-of-living increases for retirees and shifting workers to a hybrid system combining traditional pensions with 401(k)-style accounts."

In other words, Ms. Raimondo pushed legislation that broke the state's contract with its public employees. The Post's argument is that these pensions were expensive and the state couldn't afford them. This is not clear. (The Post again played the Really Big Number game telling readers about the $1 trillion projected shortfall in state pensions. That is a really big number and is supposed to scare readers. If it was interested in informing readers it would have told them the shortfall is equal to about 0.2 percent of projected GDP over the thirty year planning horizon of public pensions.)

Anyhow, if the state of Rhode Island really can't afford to pay its bills, why should public sector workers be the only ones to pay the price. The state has hundreds or even thousands of contractors. Why not short them all 10 or 20 percent of their payments? That would be the fairest way to deal with the situation if the state really can't pay its bills or raise the taxes needed to do so. Obviously the Post doesn't believe that contracts with workers are real contracts.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.