Relevant and even prescient commentary on news, politics and the economy.

Top Marginal Tax Rates and Real Economic Growth, Part 1

by Mike Kimel

Top Marginal Tax Rates and Real Economic Growth, Part 1

This post looks at the relationship between the top marginal income tax bracket and growth in real GDP per capita (from NIPA table 7.1) in the subsequent year or years.

The first graph shows the top marginal income tax rate on a given year along the y axis, and the percent change in real GDP per capita from year that year to the next along the x axis. (Example: tax rate in 1980 v. change in real GDP per capita from 1980 to 1981.) The graph begins at the start of the Eisenhower administration:

tax1Figure 1

Notice the very slight positive correlation between marginal income tax rates in a given year and growth the following year? Perhaps it doesn’t mean that higher marginal tax rates precede faster growth, but it does call into question the idea that lower tax rates are generally responsible for faster economic growth.

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Why does Trump claim that only Democrats commit voter fraud—including in pre-election polls?

Donald Trump again raised the specter of election fraud Friday, saying that the only way he would lose Pennsylvania is to Hillary Clinton is if “they cheat.”

The Republican nominee, speaking at a rally in Altoona, Pennsylvania, repeated his concerns about the fairness of the election.

“The only way we can lose, in my opinion — I really mean this, Pennsylvania is if cheating goes on and we have to call up law enforcement and we have to have the sheriffs and the police chiefs and everyone watching because if we get cheated out of this election, if we get cheated out of a win in Pennsylvania, which is such a vital state especially when I know what is happening here,” he said. “She can’t beat what’s happening here. The only way they can beat it in my opinion, and I mean this 100 percent, if in certain sections of the state they cheat.”

Trump: Clinton will only win Pennsylvania if ‘they cheat’, Tyler Pager, Politico, yesterday

One ongoing source of amusement for me in all the discussion of voter-ID statutes and such is the tacit claim that Democrats commit vote fraud but Republicans don’t.

Trump these days, though, does that claim one better.  He alleges that Democrats and Democratic-leaning independents commit polling-vote fraud.  On a massive scale, no less. And, of course, that Republicans don’t.

Every recent poll of Pennsylvania voters—and there have been several—has Clinton up in that state by 11 to 14 points; the gap grows slightly with each new poll, if I recall correctly.

What I think Trump confuses with majority voter support for him may be a flight-industry statistic from back in 1991-92 showing the number of passengers who traveled between eastern seaboard cities on any of the profitable airlines that flew those routes back then versus the number of passengers who flew on his shuttle. The latter number includes those whose transportation costs were paid to the airline as well as those who traveled for free as a courtesy from Trump, although those respective numbers appear to be the same.  But that wouldn’t cause the confusion, probably.

This is just speculation, of course.


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Velocities of M2 & MZM

I wrote a post about the velocity of M2 money supply. There were comments that the M2 money supply is a dying indicator. Well, let’s look…

There are 3 indicators for the money supply, M1, M2 and MZM. M1 is the narrowest. MZM is the broadest. M2 is in the middle.

“M1 is the money supply of currency in circulation (notes and coins, traveler’s checks [non-bank issuers], demand deposits, and checkable deposits). A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.
The broader M2 component includes M1 in addition to saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving.
MZM (money with zero maturity) is the broadest component and consists of the supply of financial assets redeemable at par on demand: notes and coins in circulation, traveler’s checks (non-bank issuers), demand deposits, other checkable deposits, savings deposits, and all money market funds. The velocity of MZM helps determine how often financial assets are switching hands within the economy.” (from notes in FRED)

Here we compare the two broadest measures, M2 with MZM, year over year % change.

m2 mzm

If  you squint, you might see the difference in this business cycle. ¯\_(ツ)_/¯

The bottom line is that the general velocity of money supply is declining throughout this business cycle. That is a continual drag on prices and output.

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Estimated Path of the Fed Rate

Using my model of core inflation, nominal rates, profit rates, labor share & capacity utilization, here is a graph of the present situation. The estimated natural real rate for this graph is 1.7%.

update inf taller

The vertical dashed green line shows where capacity utilization is now at 75.2%. The solid red line shows the path of the estimated Fed rate. The Fed rate now sits at 0.3%.

The model says that if capacity utilization goes to 76%, the Fed rate would go to 0.8% in order to stay on path to normalization.

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Trump claimed today that Clinton’s donors won’t let her reduce taxes for corporations and the wealthy. Wonder whether anyone else will notice that he said that.

Outside the factory setting [which Clinton toured today before she gave her economic-policy speech], a scattering of pro­-Trump protesters held “Hillary for Prison” signs and criticized Mrs. Clinton’s connections to Wall Street. And more than 1,000 miles away in Florida, Mr. Trump echoed that critique.

“She doesn’t have the talent” to jump­start the economy, Mr. Trump said. “If she wanted to do it, she couldn’t because her donors won’t let her.”

Wielding a chart, Mr. Trump said the Obama administration’s policies that Mrs. Clinton wants to continue have led to plummeting homeownership rates and anemic economic growth. He also suggested that Mrs. Clinton wanted to raise taxes by $1.3 trillion and place more of that burden on the middle class — something that she has not proposed.

“Many workers are earning less money in real dollars than they were in 1970,” Mr. Trump said. “And then you wonder why they’re angry.”

In Michigan, Hillary Clinton Calls Donald Trump Enemy of ‘the Little Guy’, Amy Chozick and Alan Rappeport, New York Times, today

Okay, so Clinton’s Wall Street donors won’t let her eliminate the estate tax and dramatically cut corporate taxes and taxes on wealthy individuals, which is what the Trump plan—devised by his Wall Street hedge-fund and real estate mogul advisers, his Heritage Foundation-economist adviser, and Edgar Bergen, er, Paul Ryan—says is the surefire way to jump-start the economy. Those folks know that will work because this kind of thing worked so well during the Bush administration.

Well, all right, it worked well in conjunction with bank deregulation and unregulated shadow banking that caused that skyrocketing homeownership rate during the G.W. Bush administration. The highs from which homeownership rates plummeted after the banking and shadow banking industries collapsed in the months before Obama’s inauguration.

The plummeting of which made Trump happy, he has said, because he was able to pick up so much real estate on the (very) cheap once all those homes went into foreclosure.

But Trump is crediting the wrong president for creating that buying opportunity.  His memory fails him.

And it’s not only his long-term memory that fails him.  His short-term memory is slipping, too.  He’s a businessman, so I assume he follows the trend of the stock market and corporate profit reports, or at least the profits of, say, the Fortune 100.  But apparently he forgets from one day to the next. And one week to the next.  Not to mention one year to the next, although that would be long-term memory, I guess.  Anyway, comparisons don’t seem to be his thing.

Which I guess explains why he doesn’t know that both the stock market and large-corporation profits are at record highs.  So high, in fact, that corporate CEOs don’t know what to do with all that money.  Although they do know what they won’t do with it: raise compensation for their rank-and-file workers and invest in, say, research and development.  You know, the stuff that could result in economic growth: spending by these corporations that would obviate the point of dramatic tax cuts, which Ryan, the Heritage Foundation, and Trump’s hedge fund and real estate mogul friends say the corporations would spend on compensation raises for their rank-and-file workers.  Well, all the tax-cut savings that are left after all the spending on research and development. Because money isn’t fungible after all.

There’s something about money from tax cuts that would make corporations spend the money in ways other than increased dividends, acquisitions of other companies, and mega-increases in top-executive-suite compensation.  And Paul Ryan has the secret to what it is, and he’ll only share it with Trump.

Anyway, at least we now know why Clinton, unlike Trump, wouldn’t eliminate the estate tax and dramatically cut corporate taxes and taxes on wealthy individuals.  Her donors won’t let her.

And to think I’ve wanted to see the reversal of Citizens United.  How shortsighted of me.

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Capital Flows and Financial Activity in Commodity Exporters

by Joseph Joyce

Capital Flows and Financial Activity in Commodity Exporters
Emerging markets and developing economies have struggled in recent years to regain the growth rates of the last decade before the global financial crisis. The slowdown has been particularly evident in commodity-exporters that face declining prices. The World Bank’s most recent Global Economic Prospects, for example, projects growth for those countries of only 0.4% in 2016. Moreover, the fall in commodity prices is linked to capital flows to those countries and an increase in the fragility of their financial sectors.

In a recent paper in the Journal of International Money and Finance, Joseph P. Byrne of Heriot-Watt University and Norbert Fiess of the World Bank examined the determinants of capital inflows to 64 emerging market economies. Among the drivers of capital flows were real commodity prices: an increase in these prices increased flows to the emerging markets, particularly total equity and bank flows. Real commodity prices also contributed to an increase in the global volatility of capital flows.

Commodity price cycles, therefore, should be associated with capital flow cycles, and declines in both may lead to financial crises. Carmen Reinhart of Harvard’s Kennedy School, Vincent Reinhart of the American Enterprise Institute and Christoph Trebesch of the University of Munich documented such a correspondence of capital flows, commodity prices and sovereign defaults during the period 1815 to 2015 in a paper in the American Economic Review Papers and Proceedings (working paper here). They found evidence of an overlap between booms in capital flows and commodity prices, which resulted in a “double bonanza,” and a “double bust” when capital flows and prices declined. They also recorded the incidence of sovereign defaults, and found that four of six global peaks in defaults followed double busts in capital flows and commodity markets. The most recent boom was exceptionally prolonged, beginning in 1999 and lasting until 2011, and was followed by a “double bust.”

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Democratic Fund Managers Outperformed Republican Fund Managers

Straight from the Mercatus Institute, libertarian

Tyler Cowen notes that fund managers who donate to Democrats outperformed fund managers who donated to Republicans. The difference is small compared to the huge volatility of stock market returns, but it is not small compared to the variance of the performance of the two groups of fund managers.

In particular

The authors find that for the years 2004 to 2014, with the exception of one period, equity fund managers of the two political affiliations did about the same. [skip]

A second conclusion is that for one critical period of time, December 2008 to September 2009, the Democratic fund managers did much better. They earned 25.25 percent on average, compared with the Republicans’ 17.17 percent — a difference that, by the authors’ back-of-the envelope calculations, amounted to about $13.7 billion.

Needless to say, Paul Krugman told him so.


a separate (and harder to explain) period of superior Democratic performance from May 2003 to September 2003, when Republicans controlled the major branches of the federal government.

The data sample contained no comparable periods in which the Republicans did better, though I have heard anecdotal reports that conservative and libertarian-leaning managers had a much superior understanding of the late 1970s and the Reagan recovery of the 1980s.

Ah yes the Reagan recovery. Note the data which show superior performance by Democrats and the anecdotal reports or Republican superiority. Also note that for Republican economists, it is always 1973-1991 (except for 1981-2 which doesn’t count).

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Model of Japan’s low inflation & need for higher labor share

I have been presenting a new model to explain the forces around inflation. (link1, link2)

Antonio Fatas poses a very good question. You can lower interest rates, but can you raise inflation?

“But if monetary policy is being successful we expect inflation expectations and growth expectations to increase. Both of these forces should push long-term interest rates higher not lower!  Something is fundamentally not working when it comes to monetary policy and it is either the outcome of some forces that the central banks are unable to counteract or”

I stop right there. For me, there are forces that the central banks cannot counteract. And the new model is revealing some preliminary mechanism to show how.

I applied the model to Japan’s situation of low inflation and low nominal rates.

The model builds on the idea that capacity utilization is a force that affects inflation. The current low capacity utilization is a force to push down inflation.
Another force is net profit rates (corporate profit rates – nominal rates). High net profit rates also push down inflation.
Another force is labor share. The current very low labor share in advanced countries, including Japan, leads to an environment where inflation wants to go lower.
So now I input some preliminary data into the model for Japan.
  • Natural real rate is negative = -0.6%
  • Effective labor share = 70%
  • Capacity utilization optimized at 5% unemployment
  • Adjust exponential equation of core inflation to allow for deflation, i = 0.036 * e(-13*net profit rate) – 1%

Here is the model assuming a 2% inflation target…

inf taller japan1

Two things to note here…

  1. The central bank nominal rate (solid red line) stays at the zero lower bound almost up to the natural limit of capacity utilization (vertical green line)
  2. Core inflation hovers on the edge of deflation the whole time up to the natural limit.

Even by keeping nominal rates low, inflation still stays low. Antonio Fatas talks about forces. Here we see the forces at work.

Now I solve for the inflation target that brings monetary policy into balance with the forces.

inf taller japan2

Look at the horizontal dashed green line of the inflation target. It now sits at -0.3%. The model shows that a mild target of deflation is the best monetary policy to balance the forces affecting inflation.

Also note that the base central bank nominal rate sits at the zero lower bound all the way to and past the natural effective demand limit. (vertical green line)

The model reflects the situation in Japan. Loose monetary policy cannot counteract the forces that want to go into balance at a mild deflation level.

Keep in mind that the model probably needs some tweaking to get coefficients right, but the model can explain forces that Antonio Fatas mentions.

The success of Abenomics depends upon raising labor share. A higher labor share would raise the balanced inflation target. I and others have said this from the beginning. This model gives a logic behind the view..


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