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The Two Percent Solution: Warren and the Stochastic Jubilee

The Two Percent Solution: Warren and the Stochastic Jubilee

Wait long enough, and great ideas come back around, although not necessarily wearing the same garb.  Elizabeth Warren has just come out for a 2% wealth tax (above $50 million).*  But this is simply an annualized version of my lump sum stochastic jubilee.  What’s the advantage of redistributing the whole thing every 50 years (on average) vs a steady trickle?  A periodic reset would interrupt long run processes of wealth inequality more fully than a tax, so long as the rate of return on financial assets is high enough to compensate for the extra annual pinch, which it most likely would be, since wealth holders would demand a higher rate of return.  It would also be a lot more fun.  On the other hand, it would be more complicated to administer and might be resisted by force.

On balance, I’d go for the jubilee, but I’ll take Warren’s version as a close second.

*There’s also an extra 1% on wealth in excess of $1 billion, but this is largely symbolic.

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“If Only Obama had Done the Things Obama Actually Did” J-chait

(Dan here…lifted from Robert’s Stochastic Thoughts)

“If Only Obama had Done the Things Obama Actually Did” J-chait

Jon Chait remains as enthusiastic about Barack Obama as I am, so it isn’t surprising that he wrote a blog post entitled “If Only Obama had Done the Things Obama Actually Did”. But the title does raise a question. Is Chait dumping on the very serious centrists (cough David Brooks couch) who argued that Obama should reach out to Republicans by proposing reasonable centrist policies which he had proposed (as Chait often does) or is Chait hippy punching (as Chait does when he isn’t Republipunching).The first two words in the post answer the question “Matt Stoller” OK here comes some hippy punching (I haven’t read past “Stoller”). In contrast, something is very predictable. I almost always agree with Chait (unless he is writing about charter schools and neglects to mention that he is married to a manager of a charter school company).

Charlie Pierce has been there and done that. No need to read his post to get the point — the subtitle is thermonuclear

“I’m Going to Guess This Isn’t a Winning Democratic Platform for 2020

Also, Rand Paul is not a major figure in American politics.”

Just imagine a Pierce Chait debate — might be the critical mass of snark which causes the false vacuum to decay ending the universe (which on balance wouldn’t necessarily be a good thing)).

Now hippy punching can be fun, but really guys, pick on someone in your league — it isn’t nice to dunk on a junior high school guard.

update: I clicked through to an older and excellent Chait article complaining that liberals did’t appreciate Obama in 2010 (now liberals do — the current complaints come from democratic socialists who denounce mere liberals).

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Rare Yglesias Google Fail

(Dan here…lifted from Robert’s Stochastic Thoughts)

Rare Yglesias Google Fail

(Most boring title after “Worthwhile Canadian Initiative” but I couldn’t resist) Web savvy ultra wonk Matthew Yglesias wrote “There’s no polling on specific brackets or exactly who counts as rich that I can find,” Matty just google [income to be rich poll]. Jeez. Americans have varying ideas of how much money you need to earn each year to be considered “rich,” but most people say you need to bring in at least $1 million per year. Notice that the possibility that one is rich because of high wealth not high income is too weird to even mention. That’s rich.

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Notes on the government shutdown

Notes on the government shutdown

I have a post on the housing market pending at Seeking Alpha. If and when it goes up there, I will link to it here.

In the meantime, here are a few important notes on the shutdown.

I can’t find the quote now, but about a week ago it was floated that Trump could “save face” by declaring an emergency, starting to build the wall, and then allow the government to open. Then Trump indicated that if he declared a state of emergency, that wouldn’t mean that he would open the government even then. This is a win-lose capitulation transaction, and Trump is bound and determined to show dominance over the Democrats.

Aside from the fact that there is a large portion of the GOP that is taking advantage of this to “drown the government in a bathtub,” now that a Federal judge has turned down government workers’ “involuntary servitude” challenge, Trump has a ready-made force of de facto slaves that he can recall — or not — depending on whether he wants a particular government program to work or not:

Rank-and-file Democrats reject Trump’s invitation to shutdown talks, back Pelosi in opposition to border wall

The nearly 50,000 furloughed federal employees are being brought back to work without pay — part of a group of about 800,000 federal workers who are not receiving paychecks during the shutdown, which is affecting dozens of federal agencies large and small. A federal judge on Tuesday rejected a bid by unions representing air traffic controllers and other federal workers to force the government to pay them if they are required to work.

Don’t hold your breath waiting for SEC workers or those necessary to issue food stamps to be recalled.


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Flying blind

Flying blind

The government shutdown is affecting some important economic indicators. All of the series published by the Census Bureau, including retail sales, manufacturers’ and wholesalers’ data, personal income and spending, new home sales and housing permits and starts, are not being published.  It appears that GDP is not going to be published by the BEA either.

In the past I have created work-arounds for a few economic series, in particular new jobless claims and industrial production, neither of which appear affected at this point, as the former is published by the Department of Labor, and the latter by the Fed.

If the government shutdown continues — and a long shutdown, until there is widespread pain or an avoidable disaster (like a plane crash or widespread food-borne disease outbreak) looks like the most likely scenario for now — I will attempt serviceable work-arounds for at least some of these series.

For starters, retail sales was scheduled to be released this Wednesday. Almost certainly that isn’t going to happen, so on Wednesday I’ll publish a guesstimate that hopefully will at least get the direction correct, and capture some of the strength or weakness of that direction.

But, make no mistake, not having access to reliable economic data isn’t just a drawback for me, it’s a cost to any enterprises attempting to make decisions. Some of those businesses are going to postpone making a decision — on hiring as well as spending — until they have more clarity. And the postponement of spending decisions means a drag on GDP and employment.
Unfortunately it appears that the spate of short shutdowns in the past several decades have caused Washington to “learn” that, at least in the short term, nothing too bad happens when government is closed. Thus, flying blind will continue until we crash into something.

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The Key to Gentrification

The Key to Gentrification

In the world of urban politics, there is probably no more potent populist rallying cry than the demand to halt gentrification.  Activists have fought it on multiple fronts: zoning, development subsidies, permitting, rent control—every lever housing policies afford.  But what if they’re mistaking cause for effect, hacking away at the visible manifestations of the problem while leaving the problem itself intact?

Pivot to an important article in today’s New York Times, reporting on recent research David Autor  of MIT presented at the economics meetings in Atlanta earlier this month.  It’s all summed up in this set of charts:

As you can see from the tiny print at the top, the data are being read horizontally within each chart, from less dense regions (rural areas) on the left to high density cities on the right.  The question being asked in the article is, if you live in a rural area or a small town, how much benefit can you get from moving to a big city?

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Value of the Chrysler Building and California Property Taxes

Value of the Chrysler Building and California Property Taxes

The big news in New York City is that the Chrysler Building is for sale:

New York City’s iconic Chrysler Building has appeared in dozens of movies and remained an Art Deco jewel of the Manhattan skyline for decades. Now, the 89-year-old skyscraper can be yours. Located on 42nd Street just east of Grand Central Terminal, sale price estimates for the famed Chrysler Building vary, but its majority owners, the Abu Dhabi Investment Council, hope to recoup the $800 million it paid for their stake of the building back in 2008.

They hope but some think the building might go for as little as $650 million and that does not cover the value of the land:

the land beneath the building is owned by New York’s Cooper Union School and the lease last year came to $32.5 million.

If we assume a 5% discount rate, the present value of annual lease payments like these might be another $650 million if one wants to know the value of the land and the building. But is it reasonable to assume a 5% discount rate? Let’s return to this after noting some grumpiness from John Cochrane towards something Paul Krugman wrote:

I try very hard not to get in to the business of rebutting Paul Krugman’s various outrages. The article “The Economics of Soaking the Rich” merits an exception. I will ignore the snark, the… distoritions, the … untruths, the attack by inventing evil motive, the demonization of anything starting with the letter R, and focus on the central economic points … Diamond and Saez made a big splash precisely because their estimates were so novel and so much higher than the prevailing consensus. For example, Greg Mankiw, also a previous CEA chair, and not a fraud, writing the excellent “Optimal Taxation in Theory and Practice” in the Journal of Economic Perspectives … Krugman and company are proposing a 70% top federal rate on top of all the others, which is … a bit deceptive relative to the 70% total marginal tax rate even in his cherry-picked sources.

OK – I cherry picked much of this rant so read the entire long winded thing for yourself. Optimal taxation is indeed a controversial topic and I applaud the notion that we should go beyond Federal taxation. Can someone tell Mankiw that before his next oped on how progressive the Federal tax system is? Cochrane followed this by some claim that we should include property taxes in the calculus of calculating the marginal tax on income:

How much is the property tax? In Calfornia, we pay 1% per year. That doesn’t seem bad, except that property values are very high. You can’t get a tear-down in Palo Alto for under $2 million. If you buy a house that costs 5 times your income — say someone earning $200,000 per year buying a $1 million house — then that is equivalent to 5 percentage points additional income tax. On top of 42% federal, 13.2% state, 9% sales, and other taxes, it’s part of my view that we’re past 70% top marginal rate now.

Maybe it is because so many of us in New York City choose to pay rents but adding the tax on property to the tax on income strikes me as odd. I’ll leave to others to weigh on this debate but I would be amiss if I did not note Peter Dorman’s latest post:

In the world of urban politics, there is probably no more potent populist rallying cry than the demand to halt gentrification. Activists have fought it on multiple fronts: zoning, development subsidies, permitting, rent control—every lever housing policies afford. But what if they’re mistaking cause for effect, hacking away at the visible manifestations of the problem while leaving the problem itself intact? Pivot to an important article in today’s New York Times, reporting on recent research David Autor of MIT presented at the economics meetings in Atlanta earlier this month.

Cochrane had an odd calculation of the present value of property taxes:

A 1% property tax at a 1% interest rate is equivalent to a 100% tax on houses. That $1,000,000 house is really going to cost you $2,000,000!

Wait, wait – I’m assuming a 5% discount rate and he assumes a 1% discount rate? OK, he continues:

What is the right rate? We can have a lot of fun with that one. The current 30 year TIPS (inflation indexed) rate is 1.19%. The 30 year nominal Treasury rate is 2.97%. In California, under Proposition 13, you pay 1% of the actual purchase price per year, but that quantity never increases. (This fact results in the paradox of extremely high property taxes on new purchasers, older people staying in huge old houses, and low property tax revenues.) So you might say that the nominal rate applies.

You might say? If the nominal cash flow is not indexed, then you should use the nominal risk-free rate as your starting point. So I started with a 3% rate and then added 2% more. Why the extra 2% you ask? Well I have read the seminal paper on leasing by Merton Miller and Charles Upton that note we should add a premium for bearing the risk of obsolescence. A lot of research would put that premium at 2% but I guess Cochrane wants to pretend owners of property should discount cash flows at the risk-free rate, which reminds me of that book by James Glassman and Kevin Hassett entitled DOW 36000. Never mind having fun with the appropriate discount rate – who did Cochrane rely on when teaching his students finance – Glassman & Hassett or Merton Miller?

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Slavery in the US

Slavery in the US

An issue so far not openly addressed in this “Partial Shutdown” situation is that those who have been deemed to be “essential,” are now working without pay, even though we all believe that they will eventually receive their overdue backpay. I really do not know the law that says that these people must work without being paid within a reasonable time period of their work, but my basic view of this is that people being forced to work without being paid in a clearly established time period are slaves. And this is the status of those US federal workers now being forced to work without pay. They are slaves.

A ludicrous effort by Trump to minimize the damage of his idiotic partial shutdown has been his sporadic efforts to deal with consequences of his worthless shutdown. So, we have rich cronies of his who have found themselves inconvenienced for hunting in US natural preserves. Trump has ordered that the federal employees who oversee this particular matter must show up for work to make sure that this handful of wealthy Trump cronies can hunt in US natural preserves, without pay. These federal employees must be slaves to these spoiled brat pals of Trump.

We must recognize what is going on here, although nobody prior to me now has called it for what it is, this is slavery. Trump has been ordering all sorts of fed employees to show up and perform their duties without pay as an accumulating pile of interests get to him complaining about not getting their government services.

Of course, slavery leads to shirking, unless Massa wields a whip, which I think is not seriously there, so we have already seen lines at LaGuardia airport as TSA employees call in “sick.” Everyday this condition of slavery persists, the calling in sick of the slaves will increase.

We adopted an amendment 154 years ago that abolished slavery in the United States of America. It is about time this amendment was enforced.

Barkley Rosser

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Romer & Romer on Taxes

Given the debate about returning to 60s level top marginal tax rate of 70% amazingly re-opened by Alexandria Ocasio-Cortez, I decided to actually read the Romer and Romer paper (pdf warning) which includes evidence suggesting an even higher rate is optimal. It is a masterpiece, which I won’t try to summarize. Read it.

I do however, want to grind a very old ax related to “Schlock Economics”. I am thinking of the time that Robert Lucas totally humiliated himself while accuding Christine Romer of Schlock Economics. He demonstrated that he had managed to forget the IS-LM model (honestly he might actually have failed my undergraduate intro-macro course which is a major major accomplishment few have achieved).

Old ax grinding after the jump

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Optimal Taxation of Capital Income 2019 (let them Bern).

I wrote a post about optimal taxation of capital income which (the web is sometimes wonderful) was made legible by the blessed [person who choses to remain anonymous].

But that was back in Obama center left 2008. I want to update given what I learned since then and given the appearance of socialist US citizens.

First, what I should have known already is that the standard Judd 85/86 result that the optimal rate of taxation of capital income goes to zero as time goes to infinity is what mathematicians call a boo boo (oopsie). The asserted theorem is false as explained by Ludwig Straub and Ivan Werning.

This is an interesting event in the history of thought and the sociology of economics — a standard mathematical result which is simply wrong. It is especially interesting as the proof that Judd made a whoopsie was published years ago, yet the false alleged result survives. One might almost suspect that ideology or class interest is involved.

The key issue is that Judd considered tax rates which change over time and their incentive effects and then casually assumed that the public sector budget is always balanced. I guess he guessed this was OK because of Ricardian equivalence which says that. given a long list of implausible assumptions, the timing of *lump sum* taxes doesn’t matter, so the timing of taxes only matters because of incentive effects.

In fact Judd’s alleged proof is completely invalid. It is simply a math mistake.

The model
There are 2 groups workers and investors. The workers consume all of their income which consists of a wage and, possibly, a subsidy from the state. Investors have capital income — interest after tax A_tf'(K_t)-tau_tK where tau_t is the rate of taxation of capital, A_t is their wealth and K_t is total capital (these must be equal under Judd’s assumption that the state neither borrows nor accumulates a sovereign wealth fund).

Investors maximize an intertemporal utility function with rate of imaptience rho. The claim is that if the state wishes to maximize a weighted average of workers’ instantaneous utility and investors’ instantaneous utility and also has rate of time preference rho, then Tau_t goes to zero as t goes to infinity.

Now first note that even if Judd were right it would tell us nothing about what taxes will be optimal for the next million years. Oddly, many people some of whom are economists (one of whom Edward Prescott has won the Nobel memorial prize in economics) conclude that taxes on capital income should be cut to zero right now.

Second allow the state to accumulate wealth and consider the simplest case in which investors maximize the discounted stream of the logarithm of their consumption. This means that they consume (rho)A_t no matter what Tau_t is. Assume that tau_t can’t be greater than some limit taumax or the state will grab capital instantly which is, in effect, a lump sum tax and doesn’t distort.

In this case, Tau_t does go to zero, because the state accumulates until it’s income covers all its expenses plus whatever subsidy it chooses to pay workers and the distribution of income is exactly that which it finds optimal and then ceases to tax as there is no reason to tax anyone. Note that in this case there is no trade off between efficiency and desired redistribution — the distribution converges to that desired as if there were no problems with incentives. This is roughly the opposite of the standard interpretation. In the long run, the distribution of income is exactly as desired. There is no more taxation because there is no more reason to tax.

(More generally if the elasticity of substitution is less than one in the model (as it is in the data) the state will redistribute more until the investors are relatively poorer than is optimal. This is because the income effect of the tax is greater than the substitution effect, so high taxes on capital income promote saving. But I want to mainly stick with logarithmic utility).

Now consider an extreme case in which the state cares only about the welfare of workers. Judd claims the result holds even in this case. He is wrong even if the state is allowed to accumulate a sovereign wealth fund. In that case, there is a loss due to investors consumption equal to (rho)A_t and the state aims to mimimize A_t. If there is an upper limit on Tau, then Tau_t is always at this limit. The optimal policy is to tax capital income at the maximum rate allowed forever.

Now consider Judd’s assumption that the state can’t accumulate a sovereign wealth fund. The fact that it must leave the wealth in the hands of investors who consume it at rate rho means the optimal steady state K=K* is what it would be if there were depreciation at rate rho. This means that f'(K*)=2rho.
For investors to choose this steady state, it must be that the after tax return on capital (f'(K*) – tau) is equal to rho so 2rho -tau = rho and tau=rho.

So where did Judd go wrong ? His alleged proof included the assumption that the economy would converge to a steady state. He assumed that A = K, but also considered only the social budget constraint and concluded that, in the optimal steady state f'(K) = rho (as would be true if the state had access to optimal non distortionary taxation or if it could accumulate a sovereign wealth fund). But the restriction A=K is binding & it has a non zero shadow price. That shadow price is not constant even if all observables K, A, w, R consumption of capitalists and consumption of workers are constant.

Given the problem as stated, the economy can’t reach a steady state. The gain to the social planner of being able to accumulate wealth becomes constant. It’s current value grows at rate rho.

The impressive thing is that the alleged result is still accepted even though the proof that it is a math mistake was published over a decade ago.

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