Review
Jenny Chase: Some bad things about Switzerland: low tax rates and high salaries act as a brain drain on surrounding countries (hi). This is how a poor country has become a very rich one in less than a hundred years.
Rob Henderson: I like to imagine the Bizarro universe of opposites when I see tweets like this. “Some good things about Switzerland: high tax rates and low salaries motivate skilled citizens to flee (hi). This is how a rich country has become a very poor one in less than a hundred years.”
These could both be bad if viewed as zero-sum disruptions (with negative second-order effects).
To the extent that purchases stay the same and we pay the cost domestically, that is indeed a tax paid by producers or consumers. Yes, it lowers their remaining capital, but is probably one of the least distortionary available taxes. In the terms described above, if you used the money to cut income tax rates, you’d probably be ahead.
Taxing something where the supply or demand is fixed is extremely efficient, and the extent to which purchases stay the same is exactly the extent to which supply or demand is inflexible. The economic inefficiency of a tax comes from the changes in behavior induced by the tax. The difference between a tariff and a sales tax, is that it induces you to buy native products.
I'm confused by your comments on Federal Reserve independence.
First, you have:
The Orange Man is Bad, and his plan to attack Federal Reserve independence is bad, even for him. This is not something we want to be messing with.
So, it's important that the Fed have the independence to make policy decisions in the best interest of the economy, without being influenced by political considerations? And you presumably think they have the competence and integrity to do that?
Then you say:
Also, if I was a presidential candidate running against the incumbent in a time when the Fed has to make highly unclear decisions on interest rates, I would not want to be very clearly and publicly threatening their independence.
So you think that the Fed will modify their policy decisions to help juice the economy in the short term, and thereby help defeat Trump, if they think that Trump might threaten their power? As long as things are unclear enough that it's not obvious that they're acting for political rather than economic reasons?
So maybe not so high on the integrity scale after all?
I took the second point to mean, "You do not want to put your political reputation and stabding on the line to take control of a difficult decision where there is not an obvious right choice and you are not the expert and even the right choice will make a lot of people unhappy."
Mostly this seems like
Did the sentence get cut off, or is this an intentionally implied "seems like [nothing.]"?
Previously: Economics Roundup #1
Let’s take advantage of the normality while we have it. In all senses.
Insane Tax Proposals
There is Trump’s proposal to replace income taxes with tariffs, but he is not alone.
So here is your periodic reminder, since this is not actually new at core: Biden’s proposed budgets include completely insane tax regimes that would cripple our economic dynamism and growth if enacted. As in for high net worth individuals, taking unrealized capital gains at 25% and realized capital gains, such as those you are forced to take to pay your unrealized capital gains tax, at 44.6% plus state taxes.
Austen Allred explains how this plausibly destroys the entire startup ecosystem.
Which I know is confusing because in other contexts he also talks about how other laws (such as SB 1047) that would in no way apply to startups would also destroy the startup ecosystem. But in this case he is right.
I do think they are attempting to deal with this via another idea he thought was crazy, the ‘nine annual payments’ for the first year’s tax and ‘five annual payments’ for the subsequent tax. So the theory would be that the first year you ‘only’ owe 3.5%. Then the second year you owe another 3.5% of the old gain and 5% of the next year’s gain. That is less horrendous, but still super horrendous, especially if the taxes do not go away if the asset values subsequently decline, risking putting you into infinite debt.
This is only the beginning. They are even worse than Warren’s proposed wealth taxes, because the acute effects and forcing function here are so bad. At the time this was far worse than the various stupid and destructive economic policies Trump was proposing, although he has recently stepped it up to the point where that is unclear.
The good news is that these policies are for now complete political non-starters. Never will a single Republican vote for this, and many Democrats know better. I would like to think the same thing in reverse, as well.
Also, this is probably unconstitutional in the actually-thrown-out-by-SCOTUS sense, not only in the violates-the-literal-constitution sense.
But yes, it is rather terrifying what would happen if they had the kind of majorities that could enact things like this. On either side.
Why didn’t the super high taxes in the 1950s kill growth? Taxes for most people were not actually that high, the super-high marginal rates like 91% kicked in at millions a year in income, and at that point loopholes allowed those people to largely dodge. Otherwise rates were not so high once you take into account social security taxes and medicare taxes. Also, who is to say the rates didn’t do a lot of damage? We don’t know the counterfactual and conditions were otherwise quite good.
Don’t Mess With the Federal Reserve
The Orange Man is Bad, and his plan to attack Federal Reserve independence is bad, even for him. This is not something we want to be messing with. I do wonder how much Trump ‘consulting’ would matter. It is not like he was or would be afraid to make his feelings clear or make threats without formal consultations. This is an underrated reason to be concerned.
Also, if I was a presidential candidate running against the incumbent in a time when the Fed has to make highly unclear decisions on interest rates, I would not want to be very clearly and publicly threatening their independence.
Don’t Mess With the New York Tax Authorities
Bloomberg story about New York State and its hyperaggressive pursuit of those who claim not to live in New York. New York it notorious for being by far the most aggressive jurisdiction about this. It is also clear that a lot of this is because New York has a lot of people, many of them in finance, who are doing their best to do the exact minimum necessary to claim they are not residents of New York. Meanwhile, they are constantly visiting, they keep a domicile in the state, and so on.
What I did not see were stories about people who definitely actually left the state, and were not coming back on the regular. Yes, the state is being obnoxious, but if your flight arrives at 12:05am and then leaves at 11:48pm, then that is the game you decided to play. Seems fair.
Tariffs
Who pays for tariffs? Cato suggests this handy chart.
This chart is very much trying to have its cake and eat it too.
It starts with a correct dilemma. Suppose a tariff is imposed.
On any given purchasing decision, consider a customer who would have otherwise bought a foreign good. They can either substitute the domestic good, pay for the foreign good or (not listed) substitute away entirely. If widgets go from $100 to $115, perhaps you buy less widgets and more thingamabobs.
If you get the customer to switch, no one pays the tariff.
If you don’t get the customer to switch, no one is protected.
The difference is that in the real world, preferences and use cases are continuous. What happens as you put in the tariff is that some of the customers switch. Some of the customers do not. The price of the foreign good is probably partially absorbed by the producer, partly by the domestic supply chain and partly by the customer. Economics of scale change production costs, expertise is learned, and so on.
To the extent the foreigners eat the cost and still sell, and there is no retaliation, that is a pure win for team tariff. We get money in the public coffers at foreign expense.
To the extent that purchases stay the same and we pay the cost domestically, that is indeed a tax paid by producers or consumers. Yes, it lowers their remaining capital, but is probably one of the least distortionary available taxes. In the terms described above, if you used the money to cut income tax rates, you’d probably be ahead.
To the extent purchases are switched, this is then framed above as ‘Home pays.’ This is a weird way of looking at this. No one is paying a tariff per se, what happened was we substituted domestic production for cheaper imports. This is good for the domestic producer of the widgets, and that has spillover effects to the rest of the economy, as does substituting this activity for other potential production. Whereas the buyer is worse off, which has spillover effects in the other direction in various ways.
The question is, do the benefits exceed the costs? That is hard to know. If you are using otherwise idle resources, gaining expertise and competitiveness and so on, then it could be good. If you are already at full employment and moving down the value chain, then this could be deeply foolish and bad.
What is weird is the claim that the exporter of different goods pays if the value of home’s currency changes. Presumably home’s currency changes in value slightly. But as they say this offsets the higher price ‘somewhat.’ In most cases, this seems like somewhat is very little in practice? So yes, exporters are worse off, but my expectation is the vast majority of the impact is still absorbed as per the rest of the chart. How important is this good to the dollar’s price?
My view of tariffs is that free trade is good. We should encourage more trade, not impose more tariffs, especially since they tend to trigger a response in kind. When Cato says that economists view tariffs as generally unwise and unhelpful, I agree. We would mostly be better off without them, even if others still imposed some on us.
However, it is not like our other tax options do not suck. Income taxes punish and reduce work. Capital gains taxes punish and reduce savings and investment and value creation. Value added taxes punish adding value, and so on. Cabron taxes and unimproved value of land taxes are great where you can get them, but the Pigou Club and Georgist Club do not have enough members at this time.
So if our other options are things like income taxes and capital gains taxes, a one-way tariff that doesn’t change anything otherwise seems to me like it should be about as bad as those. What (as I understand it) makes tariffs such bad taxes in the baseline case is that other countries respond in kind when you impose them, and those countries like you less on all levels, and international relations deteriorate, and so on.
People Hate Inflation
New confirmation of the IDoBadTakes theory of inflation hatred:
Do wages lag behind prices? The argument there would be that only after prices go up can you then ask for a raise based on inflation. But that assumes that we have commodity-driven inflation, rather than wage-driven inflation. Alternatively, one could argue that wage-driven inflation would be concentrated in the places where workers have the leverage, so even then most workers would be responding to changes elsewhere, and lag behind. And also wages are sticky downwards and costly to adjust, so it makes sense that they would in some sense lag behind if there was a one-time inflation shock or shift in expectations. But also it seems odd to talk about ‘lag’ at all if inflation is steady.
There was talk that we should be using an older inflation calculation. Scott Sumner points out that if you use the old inflation calculation, that puts greater weight on financing costs, it suggests +28.6% CPI between 11/21 and 11/23 with NGDP +13.4% and consumption +12.9%,which implies a major depression that we can all see did not happen, for example car sales are up not down, and a ~20% decline in effective compensation, which also obviously did not happen despite higher financing costs.
As Scott says, the question is what is the most useful measure. There is no one definitive inflation number, you are measuring many different things. Financing costs going up means that, for certain important purposes, costs really are way up recently, whereas the baseline cost of living for most people is not. I do think people are reacting to all of this in a not-so-crazy fashion.
Still, he notes that inflation does look too high, and we should worry it is reaccelerating. And it is clearly central to why people think the economy is bad.
People disliking the economy predicts presidential approval and re-election. I had not properly considered that causation runs in both directions. I knew about the partisan split, but for Biden the Democrats don’t like him either. The campaign likely changes that, so we should expect net economic sentiment to rise if things don’t get way worse.
Real Wages
Atlanta Fed finds that real wages remain down about 3%, now rising slightly.
The speculation is that this is largely due to compensation in the form of increased working from home. Working from home is now a luxury that you get in exchange for lower effective pay. It is definitely worth a 3% pay cut if you value it, but not everyone gets the benefit. If we estimate an additional 6% of workers are now fully remote and 20% have new hybrid arrangements, that implies a double digit pay cut for those workers to make this work out.
That is less obviously worthwhile and suggests a mystery remains to reconcile this with the seemingly tight labor market.
Can’t Get No Satisfaction
Another illustration of why people’s overall satisfaction with their situation does not tell you if times are good or people are happy with the times.
People answer largely by comparing their situation to expectations. So you can get some very strange distributions.
Employment
As always, one must ask over what time frame.
The National Debt
The scare tactics on debt often focus on the word ‘unsustainable.’
If you look, ‘unsustainable’ is defined to be ‘the debt-to-GDP ratio goes up.’ Yes, in some sense that is ‘unsustainable.’ It could still be sustained for quite a long time, even if real interest rates exceed real growth.
I am also confident that those simulations did not include plausible probability distributions for the impact of AI.
What does seem clearly true is that if America fails to experience substantial economic growth going forward and things are otherwise ‘normal,’ our levels of government spending under current public choice are indeed not sustainable, and if unadjusted would cause a crisis within our lifetimes. I do not think it is that likely that we will get this kind of normal scenario.
Yes, we could plausibly spend enough more than we could to get into avoidable trouble. Mostly this seems like
Immigration
A new paper on immigration by Caiumi and Peri and its impact on native wages certain to change ones of minds.
I believe the result, if you discount all the other various things that happen as the result of immigration.
Another immigration result was a National Academy of Sciences scenario analysis looking at impact over 75 years, concluding the fiscal impact of immigration is overall positive but that it was negative for those without an education beyond high school. Now two new results, Colas and Sachs and Michael Clemens, note that the indirect effects including labor supply composition and increased capital usage are sufficient that the net fiscal impact is still positive for almost all immigrants. Tyler Cowen covers it here in Bloomberg.
I file both results under the standard ‘yes obviously but it is good to demonstrate this.’
With the caveat that they get this result by considering certain select secondary impacts of immigration, while not modeling others, such as shifts in political dynamics or the housing market.
No, I do not expect any of this to change people’s opinions on immigration’s impact on their wages or the deficit, or their political or policy preferences.
Financial Literacy
FDIC Chair Sheila Bair calls Sam Bankman-Fried ‘financially illiterate.’
That is… not what financial illiterate means. The fact that the FDIC chair thinks that ‘financial literacy’ is the issue at hand worries me. This is exactly a lot of why SBF considered ‘adults in the room’ to be useless to him. SBF was a thief and a fraud and he got caught, that does not mean he was confused about what he was doing. I mean, yes, there were the parts where he was too scatterbrained and overloaded and indifferent to care what was going on or give decisions more than a minute’s thought, but that wasn’t because he lacked an education.
Financial literacy can start early. Talk to your kids about common sense.
Everyone gets full credit.
Reversal
I like this trick:
FTX customers to recover ‘all funds lost in collapse’ in terms of the at-the-time dollar values of their portfolios. They still took a big hit in several ways, but this is a better result than anyone expected for a while.
Status Update
Noah Smith discusses the fall in status for economists, especially macroeconomists, and various complaints people have against economists. Mostly I think this is part of the general (and in many places well-earned and long coming, but also coming from a general unwillingness to accept ugly realities and take the best you can get) fall of respect for expertise and credentials?
Scaling Hypothesis
Patrick McKenzie explains that there are many tax deductions or dodges that you can in practice take for small amounts, such as not paying on the cash back or frequent flyer miles on business credit cards and trips. In practice the IRS will not care in most cases. But if you scale things high enough, if you optimize for the deduction hard enough, then it is worth the IRS’s time to have a problem with this. A lot of tax law seems to be, essentially, ‘write down whatever you want within reason but do not push it.’
Payments
Seriously, charge more. Plagiarism checker sold for eight figures. It has a free plan and a $10/month plan. Buyer adds a $30/month plan and a $100/month plan. Revenue doubles.
Stripe announces it will accept stablecoin payments this summer.
Plasma donations are way more impactful than I would have expected. For the doners, that is, not those who need plasma.
That’s a huge decline in turning to very expensive alternative emergency funding mechanisms. Read that last line again.
Plasma donation actually pays pretty decently. You can do it twice a week for $30-$50 a pop. No, it is not ideal if the poor are falling back on that to avoid payday loans, but it seems way better than actually falling back on payday loans. Which in turn is often better than actively running out of money, although I think this is less obvious than economists typically assume it is because behaviors adjust to the optionality.
Pricing
NPR reports supermarkets including Walmart are getting ready to offer fully dynamic pricing, adjusting ice cream and water upwards when it is hot, products close to expiration down, all in real time. I am here to warn those supermarkets: Don’t. If you raise prices on ice cream when it gets hot, your customers will absolutely revolt and crucify you, and this will dominate efficiency gains and revenue extraction. Even more than that, people need price consistency. Sales are fun opportunities, by all means do those and rotate and customize them more, but that is where it stops. If I have to confirm the price of everything each time I visit, I’m going to find another store.
Real ‘and your plan is to blackmail him’ energy on this one.
That is to say nothing of the practical considerations of having to ‘disclose and explain’ changes in cost of goods sold, gross margins and pricing strategies on a quarterly basis.
Never Reason From a Price Change
Never reason from a price change, attempt number quite a lot from Scott Sumner. Somehow, the exact timing and wording of this one sunk in for me, substantially more than previous efforts already had. This in particular:
My brain wanted to roll its eyes and say ‘yes, yes, Scott, we all get it, but still, what if the price did change anyway?’
And then I went through several cycles of ‘no, wait, that actually does not make any sense, the price will not change unless you change something else to make it change.’
You can do that via government fiat or monopoly decision if you want, but that too has a story that tells you what will then happen.
A Changing Price
Would it have been wise to short DJT, Donald Trump Media?
I do not know. Certainly we all thought about it. But of course that is a hint. There was no rule saying the price had to come down quickly, or that it could not first go up quite a lot. And the borrow cost was something like 400% annualized.
I mean, I assumed when I saw it that Joe was joking.
I agree that the easiest play in situations like this is to wait until the party is clearly over, then get in on the way down. But even that is not so clear or safe. There is reason one cannot start another party.
One could say that the price of a DJT is not the real market. The real market is the price to short the stock, including all the risks that entails. That price is high, and plausibly efficient.
You still can beat the market, somewhat, by avoiding being on the wrong side of this trade. You do not want to be long DJT while its borrow costs are over 400% (unless you are at minimum collecting that borrow, and also have very good other reasons, by default this is a no just no).
In general, since it is expensive to short things, it it not even such a violation of EMH to say there are things you should know not to be long. When I buy individual stocks, I may not be that confident I can pick stocks to buy, but I am confident I can pick some of the stocks not to buy.
The Price of Tourism
Tourism is like anything else. If you have too much of it, as Tyler Cowen reminds us, you should raise the price rather than lower the quality or restricting supply.
The weird thing about experiential goods like tourism is that people often get super mad about fees that go to the provider of the experience, while being happy to fork over ten or a hundred times as much so they can travel to the experience, and they can rearrange their lives to allow them the time away, and even to scalpers and travel agents.
This is backwards. You should be thrilled to support and reward those providing the actual value, not call them ‘greedy’ or accuse them of gouging. They are the ones producing the amazing value. Much better the value go to them than the scalpers and hotels and airlines.
Thus Japan has this exactly right. Raise the tourist price of the bullet train. Not only is this charging money, it is charging money in a relatively socially acceptable place.
Alcohol
Should we break up a big alcohol monopoly that is abusing its power, charging small retailers more than large ones? Tyler Cowen says no, because monopolies raise prices and reduce quantity, and for alcohol that is good. Like Tyler Cowen, I do not drink at all and think alcohol is best avoided by essentially everyone, and ideally taxes here would be higher but people wouldn’t go for it.
I still think we should either repeal or enforce the law.
Sam Bowman offers an interesting other argument, which is that the current system is highly conducive to a long tail of high quality product variety. In that context, if the lousy alcohol is more expensive, then that’s good for the niches.
The Efficient Company Hypothesis is False
The generalized Efficient Market Hypothesis, I hereby dub it the Efficient Company Hypothesis, is super duper false.
Similarly, did you know Nvidia pays a $0.01/share dividend so funds that can only invest in companies paying dividends can hold shares? Yet other companies choose not to do this.
Falling Inequality
Is that what this says? It is telling to conflate reduced inequality with good. This seems to show that median wages and 90th percentile wages are at roughly pre-pandemic levels, versus a small but real rise from 2015-2020. 10th percentile wages rose throughout, similarly under Biden versus the previous period, it looks like it returned to the trend line almost exactly.
Whereas what Andreesen is saying is that those complaining about how our horrible inequality is constantly getting worse are clearly wrong, with a huge ~18% jump over this period in relative wages.
That is distinct from the question of whether the Biden economy is good. Yglesias frames this as ‘things were very good in 2019 and are also very good now, except higher interest rates’ but higher interest rates impose big real costs. Is a 6% growth in real median wages over 5 years as measured (which as I have noted elsewhere I think overstates things in practice even without interest rates) a ‘very good’ economy? I mean, it’s fine, it is improvement over time, but it isn’t great.
Falling Hours Worked
Axios reports work weeks now down to starting on average on 4pm on Friday, versus 5pm as early as Q1 2021, in their survey data.
The central story here seems more about a radical decline in hours across the board? People are calling it a day earlier, at least in this population, and presumably working less, and that happened rather quickly. They speculate it is due to remote work less often bleeding into evenings.
Trust Me
Via Tyler Cowen via Kevin Lewis, companies that use explicit invocations of trust in their 10-K are less trustworthy. File under papers with results we all assumed but it is good that people took the time to put it in a formal journal so we can say Studies Show.
The way I learned this one was my father’s wise saying, ‘Never trust anybody who says ‘trust me.’’
China
China is continuing down the path of an increasingly centrally planned economy. A CEO from the China Development Forum (CDF) reports via CNBC’s Michelle Caruso-Cabrera that confidence is very low and business continues to be terrible. Wealthy Chinese are selling their conspicuous trappings of wealth and trying to move money out of the country given how dangerous it is to be rich in China, and that Xi intends to double down on his economic strategy of favoring and focusing on state-owned enterprises. There also was not mention of China’s dire demographic time bomb.
Xi does not understand (unless he does and simply does not care?) that this never works and it will not work for him. Xi says the governing system of China is not going to change, but indeed it has changed, retreating from its previous compromises. And given this attitude, it is likely to change more in the same direction. It will not go well.
He also made various statements on US-China relations and Taiwan, including emphasizing avoiding the Thucydides trap and nuclear war at all costs. He is mad about Taiwan and our policy on semiconductors, but why shouldn’t he be?
Similarly, here is Graham Allison, who also points out Xi’s clear understanding of the need to play out this rivalry peacefully, and that there is room for prosperity for all.
Jamie Dimon reminds us that obviously we should re-enter the prior negotiated Trans-Pacific Partnership. If you think we have to ‘beat China’ and do not at least want to be in the TPP, I have no words.
Other
Find a need and fill it.