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The David Brooks Phenomenon: He does ‘rewrite’ for Megan McCardle! [UPDATED]

Piketty wouldn’t raise taxes on income, which thriving professionals have a lot of; he would tax investment capital, which they don’t have enough of.

— David Brooks, The Piketty Phenomenon, New York Times, today

Alexandra Petri has a trademark-funny piece today in the Washington Post that she promises tells you “[e]verything you need to know about Capital — the hot summer beach read.”  She goes on to say that although many people will buy the 700-page book, and that many already have–Amazon is out of stock!–not many of those people will actually read it.  And that most of those lucky enough to already have a copy, have not read much, if any, of it yet.

So I’m wondering: Which category is David Brooks in? As a NYT columnist he probably had access to an advance copy before the book’s English-translation release. But since his claim that Piketty wouldn’t raise taxes on income sounds suspect to me–you can figure out from that comment which category I’m in–I wonder whether, rather than read the book, Brooks just Megan McCardle’s Bloomberg View op-ed three days ago, which Petri links to, and which reads as a rough draft of Brooks’s article.

McCardle, as Petri points out, says she has not read the book.  She also says:

What hasn’t improved [since the 1970s in America] is the sense that you can plan for a decent life filled with love and joy and friendship, then send your children on to a life at least as secure and well-provisioned as your own.

How much of that could be fixed by Piketty’s proposal to tax away some huge fraction of national income from rich people? Some, to be sure. But writing checks to the bottom 70 percent would not fix the social breakdown among those without a college diploma — the pattern of marital breakdown showed up early, and strong, among welfare mothers.

Maybe not.  So how about writing checks to, say, the University of Michigan, which back in the not-that distant past, when it received roughly 80% of its funding from the state, and large research grants from the federal government, had a student body that consisted of something slightly less than 125% that were from upscale households within the state or from Manhattan and Connecticut?  How about writing checks to the Detroit Public School system, or the Lansing Public School system, of the Kalamazoo Public School system, to hire teachers who have excellent credentials and pay them well?  How about writing checks for excellent mass transit systems between rural areas, inner cities, and thriving university and research towns like Ann Arbor?

Or how about writing checks for tutors and test-prep classes and informal community learning centers for children and adults?  Or for paid apprenticeships and internships?

You get the picture.  But Brooks does not.  He writes, not for the first time, about the appalling gap between the advantages that the children of educated professionals have and the children of working class parents.  He’s spot-on on that.  But does Piketty really say that taxes on non-capital “income” of the elite should not be raised? And can Brooks explain why income from capital should be taxed at a lower rate than income from labor? In typical Brooks fashion, he doesn’t even acknowledge that it currently is.

Piketty is French.  He is neither an American citizen nor an American resident.  He has spent all but (from what I can tell) about five years of his life in France.  His Ph.D. is from the London School of Economics, and his first teaching job was at MIT; he taught there for two years, 1993-1995.  If he doesn’t expressly recommend a higher tax rate on upscale American salaries and bonuses, might that be because it is only here in the United States where top corporate executes receive such huge compensation and where certain professionals are paid disproportionately well vis-a-vis those lower on the socioeconomic scale?  Piketty’s wealth-tax proposals are not narrowly prescriptive to the United States.

Ultimately, of course, it’s the specifics of Piketty’s research, not his policy suggestions, that make the book the phenomenon that it is. But I suspect that Brooks if wrong when he says that Piketty thinks taxes should not be raised on income of high earners in the United States.  I’ll have to rely on someone who’s read the book to correct me if I’m wrong.  I wish Paul Krugman read Angry Bear.



UPDATE:  As Bruce Webb and Dan Crawford pointedly pointed out in the Comments, there are in fact strong forensic indications (I’m paraphrasing here) that Krugman does read AB.


Paul Krugman DOES read Angry Bear. For God’s Sake he cited me once and has referenced other Front Pagers as well.

AB consistently shows up in lists of top 20 most influential politico-economic blogs. that not so many of those top opinion makers take the time to stay and comment is not surprising. …


Usually AB is cited 3-4 times by PK each year.

Actually, I knew that. I replied:

OK, OK, OKayyyy. Yiiikes. Can’t you guys take a joke?!

It’s no fair, though, cuz he’s never, ever cited ME. And until he does, it’s not official that he reads AB!

Unrequited love is so painful.

It is, Paul.  It is.

[Italics added; you can’t italicize in the Comments.]

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The Dangerous Logic of the Steady-State Fisher Effect

Noah Smith brought up the issue of the long run Fisher effect. Yet, he wants to see micro-foundation models.

“Specifically, what I’d be interested to see is for someone to find some micro-foundations for the Neo-Fisherite result that don’t depend on fiscal policy reaction functions.”

He found a paper written by Stephanie Schmitt-Grohé and Martín Uribe where they offer a solution to the liquidity trap using the Fisher effect. They conclude…

“Finally, the paper identifies an interest-rate-based strategy for escaping the liquidity trap and restoring full employment. It consists in pegging the nominal interest rate at its intended target level. … Therefore, in the liquidity trap an increase in the nominal interest rate is essentially a signal of higher future inflation. In turn, by its effect on real wages, future inflation stimulates employment, thereby lifting the economy out of the slump.”

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Capital in the 21st Century Discussion at The Graduate Center, CUNY

Last week there was an 1.5 hr discussion with the following participants:  Joseph Stiglitz (Columbia University), Paul Krugman (Princeton University), and Steven Durlauf (University of Wisconsin–Madison) participated in a panel moderated by LIS Senior Scholar Branko Milanovic.

The Center just posted it yesterday on their youtube channel.

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The Supreme Court’s Runaway AEDPA Train–And What Can Be Done About It Via Collateral Judicial Review. (Yes, this is technical language, but bear with me. I explain it.)

UPDATE: Elena Kagan served as an Associate White House Council in the Clinton administration in 1995-96, when AEDPA was being drafted and negotiated.



“Freedom” does not include actual physical non-imprisonment; to the contrary, “freedom” means states’–or actually, state courts’–and prosecutors’ freedom to violate criminal defendants’ constitutional rights, to their heart’s content.

— Me, Angry Bear, Apr. 5

For about 24 hours this week, specifically between Tuesday morning and Wednesday morning, I thought that might be about to change.  The issue in Tuesday’s big affirmative action case, Scheutte v. BAMN, was not actually affirmative action.* It was instead whether a state voter initiative that amends the Constitution and that singles out minority races erects unconstitutionally high barriers to racial minorities’ practical ability to obtain a change in that policy, because it removes the possibility of gaining a change through the normal political and governmental processes.

Kennedy wrote the plurality opinion for himself, Roberts and Alito. Roberts also wrote a separate concurring opinion.  Breyer joined only in the outcome, writing a separate opinion only for himself. Scalia, joined by Thomas, wrote a separate opinion concurring in the judgment. Sotomayor, joined by Ginsburg, wrote a dissenting opinion.  Kagan did not participate.

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2 Snippets to watch… World Trade & Productivity

World Trade weakens in Early 2014, Wall Street Journal:

Weakening world trade is something to watch according to Michael Pettis.

“… redistributing income downwards is easier said than done in a globalized world, especially one in which countries are competing to drive down wages. The first major economy to attempt to redistribute income will certainly see a surge in consumption, but this surge in consumption will not necessarily result in a commensurate surge in employment and growth. Much of this increased consumption will simply bleed abroad, and with it the increase in employment.

Less global trade, in other words, will create both the domestic traction and the domestic incentives to redistribute income. In a globalized world, it is much safer to “beggar down” the global economy than to raise domestic demand, and so I expect that there will continue to be downward pressure on international trade.”

Until we understand this do not expect the global crisis to end anytime soon, except perhaps temporarily with a new surge in credit-fueled consumption in the US (which will cause the trade deficit to worsen) and more wasted investment in China (which, because it is financed with cheap debt, which comes at the expense of the household sector, may simply increase investment at the expense of consumption). These will only make the underlying imbalances worse. To do better we must revive the old underconsumption debate and learn again how policy distortions can force up the savings rate to dangerous levels, and we may have temporarily to reverse the course of globalization.

Grand Central: Time to start worrying about the US productivity slowdown, Wall Street Journal:

Productivity growth in the US has been slow for 3 years. It will eventually rise again but only as effective demand rises. Here is a graph plotting US productivity against effective demand since 1967.

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Low interest rates and low inflation at full employment

How low can you go? No… this is not a post about Limbo. It is a post about low interest rates, low inflation, and economic growth.

The question is… Can low inflation stay low as the economy heats up around full employment?

Let’s look at Europe. Low interest rates and falling inflation are not stopping economic growth. Brian Blackstone from the Wall Street Journal wrote about this yesterday.  Here are some selected quotes from his article…

“The super-low inflation rates (in Europe) are the average for the euro zone and are propped up some by higher inflation in Germany (1.04%). Five euro members—Greece, Spain, Cyprus, Portugal and Slovakia—have negative rates.”

“Yet the euro zone’s economic recovery is proceeding faster than expected… And it raises a key question for European policymakers: can economic growth coincide with weak prices? In a recent speech, Jaime Caruana, general manager of the Bank of International Settlements, a consortium of central banks, suggested it can.”

“Still, recent economic reports suggest the euro zone is showing little if any ill effects from low inflation, which has been driven to a large extent by softer food and energy prices. This adds to disposable income and may help consumption…”

” Euro members outside of France and Germany posted their strongest output gain in more than three years, according to the PMI report, despite ultra-low inflation or falling prices.”

The European economy is heating up and inflation is actually still falling. Will inflation keep falling? The long run Fisher effect states…

  • when a central bank’s nominal interest rate is held steady, whether deliberately or not (such as against the zero lower bond), eventually inflation adjusts to the nominal rate in the long run so that the real interest rate returns to its natural level.

Currently, the long run nominal interest rates set by central banks in Europe are below 1% with many at the zero lower bound. According to the Fisher effect, inflation would like to move lower so that the real interest rate rises higher towards its natural level of 1% to 2%.

The long run Fisher equation could look like this when Europe reaches full employment…

Natural real rate of interest (1.0%) = nominal interest rate (0.5%) – expected deflation (-0.5%)

So yes, inflation can keep falling according to the long run Fisher effect. The combination of quickening economic growth and falling inflation makes sense as the Fisher equation finds its long run equilibrium toward the end of a business cycle. The central banks only need to keep their nominal interest rates low.

But there is a risk hiding in the shadows. Again from the article by Brian Blackstone…

“With inflation already so low, an economic shock could push the bloc into more punishing deflation.”

I suppose central bankers will cross that bridge when they get there. In the meantime, low interest rates and falling inflation don’t seem to be a problem, as long as the economy is growing.

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Everything you need to know about Tax Freedom Day®

Monday, April 21, was 2014 Tax Freedom Day®, according to the Tax Foundation. The Tax Foundation is not exactly known for unbiased research, and its promotion of Tax Freedom Day® is no exception.

The Foundation claims that Tax Freedom Day® is “a vivid, calendar-based illustration of the cost of government.” In other words, instead of saying that its analysts expect total taxes in the United States (including social insurance) to reach 30.2% of net national income (NNI) in 2014, they say that Tax Freedom Day® arrives three days later than last year. Precise, huh?

Of course, the word “freedom” tips us off to the fact that the Tax Foundation is actually trying to create an emotional response. Something along the lines of, “Oh boy, after today I’m working for myself rather than the greedy government!” The implication further is that the later Tax Freedom Day® occurs, the worse it is for the country. The thing is, neither of these insinuations is true.

As the Center on Budget and Policy Priorities points out every year, that emotional response, frequently picked up directly by the media, is not true for the vast majority of Americans. As CBPP’s Figure 1 below shows, for the federal portion of taxes, more than 80% of Americans are paying less than the 20.1% federal component of Tax Freedom Day® would suggest. (In addition, the burden of some taxes does not fall on individuals at all.) The Tax Foundation responds that it’s not trying to mislead anyone, it’s just comparing “total U.S. tax collections with total U.S. income.” Of course, if that were all it was really trying to do, it could just say that projected tax collections equal x% of NNI. But no, it trumpets Tax Freedom Day®.

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Two ways to Fish with the Fisher Effect

I wrote some 4 days ago about the Thoma/Williamson debate. I thought Stephen Williamson w0n the debate with his views on the Fisher effect, which basically state that keeping the Fed rate low into the long run will create low inflation. The basic principle underlying this view is that the real rate of interest is invariant with monetary policy in the long run.

There was some criticism that I agreed with Mr. Williamson. Now today Noah Smith wrote about the “the Neo-Fisherites”. I consider myself one of them.

There is confusion about how the central bank’s (CB) nominal interest rate affects inflation. There is a short run and there is long run strategy. Noah Smith is referring to the long run strategy to affect the inflation rate.

You might hear someone refer to Canada where they have targeted a 2% inflation rate over 20 years. And with all the ups and downs of the CB rate in Canada, they certainly have achieved a 2% inflation. They were able to do this because they raised the CB rate to lower inflation, and then lowered the CB rate to raise inflation. But now the Fisher effect is telling us that lowering the CB rate will actually lower inflation. That is contrary to what worked for the central bank in Canada.

The key is to separate the Fisher effect into a short run and a long run.

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Speeding toward inequality,1266599531,1/stock-photo-speeding-car-on-the-road-shoot-in-this-car-47006323.jpg

If you were a passenger in a car speeding toward a cliff, you would scream at the lunatic driver to steer away or slow down. The car is our economy. The cliff is inequality. Inequality is a disaster for society.

Who is driving the car? A combination of government policies and business institutions are steering the car toward inequality. We see low taxes on the rich and norms for higher and higher CEO pay. We see the real wage struggling behind productivity. Changing these policies would steer us away from inequality.

What has been making the economy go so fast toward inequality in these last 2 years? … Monetary policy is the engine of the economy. When you push down on the gas pedal (interest rates), the car (the economy) goes faster. The speed at which we are generating inequality is largely based on monetary policy. And our long run aggressive monetary policy is speeding toward inequality.

Monetary policy mostly depends upon the wealth effect to boost demand. Yes, the Federal Reserve has programs to direct liquidity into communities, but the larger impact of monetary policy is still the wealth effect through QE and the zero lower bound Fed rate. Productive investment is muted due to low labor consumption power. The wealth effect is a fast track to inequality when the economy is being steered toward inequality. If the economy was being steered toward a healthy balance between labor and capital, monetary policy would be benefiting broader society.

Words from Jeffrey Snider at Alhambra Investment Partners.

“That is because the “wealth” effect has nothing to do with wealth at all, rather it is properly defined as an inflation/credit system. Thus any relationship between asset inflation and consumer spending is indirect.”

“… we need to stop focusing on monetarism and credit, and instead allow direct economic expansion through the wages of actual capitalism. This convoluted monetarist system is simply too inefficient to sustain and nurture long-term economic success.”

If the government is unable to tax the rich.. if businesses are unable to raise labor’s real wages faster than productivity growth… if business is unable to lower CEO pay… if off-shore tax havens are not controlled… in essence, if the economy cannot steer away from inequality, can central banks at least slow down the speed at which we head toward inequality?

Society needs time to form a proper response to growing inequality.

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