Robert Reich pulls it all together

Today I heard the economist and former Secretary of Labor Robert Reich on National Public Radio with a great commentary on the state of our national economy. Here's an excerpt:

According to new polls, the economy is the number 1 issue for American voters. But that's not just because the economy is slowing and mortgages are harder to come by. The real reason is middle-class families have exhausted the coping mechanisms they've used for over three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation.

For the economics students of the world

Our lives are intrinsically intertwined with economics, writ large. Unfortunately, the discipline of economics itself, as taught in our colleges and universities, has been straitjacketed by neoclassical or orthodox believers, who have narrowed and narrowed the scope of economic studies and inquiry. As one economics professor told me, “we have not only eliminated any dissenting viewpoints. We have burned their bodies, buried them and stomped on their graves.” !

I recently learned of an international student effort to lobby their economics departments to take off their blinders and allow for multiple viewpoints in economics. Here's an excerpt from their website:

The PAE movement is not about trying to replace neoclassical economics with another partial truth, but rather about reopening economics for free scientific inquiry, making it a pursuit where empiricism outranks a priorism and where critical thinking rules instead of ideology.

My point isn't to trash every economics professor in the country. But the discipline itself is in danger of irrelevancy, as it refuses to reflect upon the uncertainty surrounding most of the big questions in economics.

Compelling Economics Statistics

I subscribe to BusinessWeek, and am not above poaching compelling statistics from their articles to share with you. Together, they tell the story of how our economy is working (or not working) today.

• Consumer spending is the most important contributor to economic growth. It accounted for 2/3rds of the growth in real GDP last year. In the second half of last year, it contributed all of GDP growth (April 23 2007 BW). Household spending was soft in the 2^nd quarter of 2007. Consumer outlays adjusted for inflation grew about 1.5% - 2% at an annual rate after gains averaged 4.25 in the two previous quarters. Are higher gas prices the culprit?

• In the three months through March, retail food prices rose at 7.4% annual rate, the fastest such pace in 17 years (May 7 2007 BW).

• Food & gas make up about 20% of consumer spending (July 30 2007 BW).
  

• Slower business inventory growth subtracted a large 1.2% from the 4^th quarter 2006 GDP rate (May 14 2007 BW).

• And here's one statistic which should make you distrust statistics:

  Sales of new homes soared in April by 16.2%, the largest monthly gain in 14 years, an annual rate of 981,000 home sales (June 11 2007 BW).

• Why are corporate earnings so strong? Because foreign earnings are strong (thanks to a weak dollar, which cuts the prices of U.S. goods abroad): 1^st quarter earnings receipts from abroad are up 15.6% from a year earlier. 2nd quarter were equally as strong. Corporate profit margins up to 14.5%. Foreign profits have surged at an average of 19% per year since 2002 (June 18 2007 and September 17 2007 BW).

More Leisure Time: A Solution to Inequality? (Probably Not)

The Federal Reserve Bank has a biweekly e-mail chock full of news, the latest economic research, and sundry predictions on the future of the economy (weighted towards the neoclassical - the free market is best - point of view). A recently highlighted study on leisure time by two University of Chicago economists Aguiar and Hurst takes a unique approach to income inequality, raising some sticky questions:

• Can having more leisure time - like days of vacation - make up for lower wages? If it's true that high-income earners have less leisure time than low-income earners, does that mean that low-income people are 'better off,' in a way? Does it make up for the inequality in incomes?
  
• How does a worker value not-working, aka 'leisure time'? Does a low-income person value leisure time more or less? Does a high-income earner value it more or less?
  

Here's the abstract for their paper:

In this paper, we use five decades of time-use surveys to document trends in the allocation of time within the United States. We find that a dramatic increase in leisure time lies behind the relatively stable number of market hours worked between 1965 and 2003. Specifically, using a variety of definitions for leisure, we show that leisure for men increased by roughly six to nine hours per week (driven by a decline in market work hours) and for women by roughly four to eight hours per week (driven by a decline in home production work hours). Lastly, we document a growing inequality in leisure that is the mirror image of the growing inequality of wages and expenditures, making welfare calculation based solely on the latter series incomplete.

In summary, men and women have gotten more leisure time over the past 25 years, and low-income people tend to have more leisure time than higher-income people. Sounds like good news - Americans are one step closer to the dream of a 40 hour work week, more time to spend with the kids or work on the car, etc. In fact, vacation time, paid sick days and the like are very important and often over-looked indicators of a decent job. I can't argue with premise of this paper - that more time off can help a person lead a happier life.

But - does more leisure time matter for the 47 million Americans who do not have health care coverage? How many of those workers who have more leisure time actually chose to work less, as opposed to not being able to find a full-time job or a job with health care benefits? A 'leisuring' person could be spending quality time with their children, or in the doldrums of depression because they can't make ends meet or take their sick eight-year old kid to see a doctor.

Anecdotally I feel like I'm on solid ground - google "Wal-Mart employee denied full-time" and start scrolling through the 199,000 results.

By the numbers, there's also plenty of evidence that questions whether leisure time is a desired outcome: In April, prior to the blow-up of the housing market, the number of under-employed workers - at 4.4 million or 8.2%- was the highest it has been since September 2005.

And wait - Men and women workers of America have more spare time? I'm not so sure. The average annual family hours worked actually went up 11% from 1975 to 2004. In other words, it's likely that not just one parent in the family - it's both. This is a huge shift, which has implications for family life. If you look at the metric of the average of weekly hours worked, it has remained pretty stable - but that's an artifact of women's lower work hours relatively to men dragging down the average.

I'd feel better about an increase in leisure time if I knew we had a strong national economy that created decent-paying jobs with health care benefits. As it stands, the economic growth of the 2000s has accrued to the most wealthy, and decent-paying jobs are in scarce supply. That trumps leisure time.

Taxing Haircuts and Lawyers

Any policy maker or member of the public considering whether to support a particular tax proposal should ask themselves this question: You want to preference group A [by giving them a tax break or taxing everyone but Group A], why do you want to penalize everyone outside Group A? The vast majority of states in the country have a retail sales tax. In Minnesota, we exempt food and clothing for our sales tax, which puts less burden on low-income individuals. The state does tax plenty of goods – including restaurant food, electronics, coffee at Starbucks, etc. Coffee drinkers and athletes all pay a little extra when they buy their Starbucks coffee or their Nike shoes. However, when a lawyer submits a bill for services in filing for divorce, the person paying the lawyer does not pay a sales tax. Hire a public relations firm? Zero taxes. A trip to the tanning salon? Zero tax. A person who buys a lawnmower is taxed, but a person who hires a lawnmower service is not. .

The end result: A distorted sales tax system. Almost any economist would say from that a tax on some services and goods but not all creates economic inefficiencies, or an incentive for people to buy the untaxed goods. What Minnesota has lacked is a reason why: Why is our tax policy to preference public relations firms and lawyers over snowmobile purchasers?

Back when “the Body” was Governor, Ventura proposed broad-reaching tax reform which would have lowered the sales tax rate, while expanding the reach of our state sales tax to services such as lawyer fees, haircuts, etc. Estimates put the amount of revenue raised by this change at about $500 million a year. His tax-cutting-base-broadening proposal was promptly declared dead-on-arrival at the state legislature. Lobbyists for business interests lined up against the idea. Relations between the Governor and the Legislature were not good, and this likely did not help the chances for a discussion on the merits of the proposal. In any event, this issue needs revisiting.

In the meantime, we can look to Maine, which recently took up a sales tax base broadening proposal. The Center on Budget and Policy Priorities has a quick analysis at: www.cbpp.org/2-1-07sfp.htm

Corporations Increasingly Spending Their Cash Outside America

U.S. corporations have been slow to invest. That is, slow to spend money on new computers for their workers, or goods to stock their warehouses, etc. In the fourth quarter of 2006, slower inventory growth subtracted a large 1.2% from the GDP rate. Capital investment has somewhat rebounded in recent months, but is still lagging. Yet corporate earnings and profits have remained robust – Corporate profit margins were up to 14.5% in the 1^st quarter of 2007. Corporate earnings in the 2^nd quarter were 6.4% - the biggest gain in over a year. If it isn't because corporations are in a cash crunch, why aren't more of corporate profits being reinvested?

Admittedly, it's a complicated story to tell – the cost of capital, a surge in turning profits into dividends for shareholders and confidence of managers in the strength of consumer spending/their sector – are all key characters, and deserve their own blog column.

BusinessWeek (4/23/07) has written a very enlightening article on a lesser-told protagonist: It may not be that corporations aren’t spending their profits – it's just that they're not doing it the U.S. Official national economic indicators only capture investment in the U.S of A. BW’s own analysis of one-thousand large and medium-size U.S-based companies found that corporate global capital expenditures were up 18.1% in the 4^th quarter of 2006 over the previous year. Domestic expenditures were up only 8.9%, without adjusting for inflation.

BW makes the point that globalization means that corporations are global, and their spending/investing activities are also global – outsourcing manufacturing and other capital investment activities to lower-cost locales like China. Minnesota’s homegrown 3M corporation is a case in point:

“Out of 18 new [3M] plans or major expansions in the works, only seven are in the U.S...

"The bottom line is: If a company is investing in the U.S., there’s a good chance it’s buying computers or some other piece of machinery made overseas. And if a piece of capital equipment, such as construction machinery, is made in a U.S. factory, there’s a good chance it will end up being shipped abroad – perhaps even to help build a factory for a U.S.-based company that is expanding in another country.”

It's a Tax & Economics Blog

My goal in writing this blog is to highlight tax and macroeconomics research which I find particularly illuminating or useful.

When it comes to public policy, nothing could be more important. Sheldon Cohen, former IRS Commissioner, once said: "The Tax Code, once you get to know it, embodies all the essence of life: greed, politics, goodness, charity." Taxes can fund public goals - from cancer research to public education. Taxes can also be used to limit or punish certain behaviors - witness the Superfund polluter tax and the cigarette tax. And then there are the myriad tax loopholes and preferences embedded in the tax code forevermore, costing the public billions of dollars of lost revenue, but without the annual review that domestic programs must face each year by Congress.

Tax policy is, by function, subjective - Balancing efficiency and fairness - forget black and white - it's all shades of gray. Sadly, public discussion around taxes is usually long on rhetoric and short on substance. We hear the knee-jerk reaction of elected officials to establish their bonfides by promising to not raise taxes. Neo-con economists are quick to point out the economic inefficiencies that taxes produce - ergo, taxes should be avoided at all costs. The goal of this blog is to step away from these kinds of grand pronouncements and attempt to delve into those shades of gray.