Re: Laffer Curve
Does the following have any bearing on the Laffer Curve discussion? Hammermesh estimated that a 10-percentage point reduction in payroll taxes would lead to a short-term 3 percent increase in employment and a long-term 10 percent increase in employment United States. It sure does. A ten percentage point drop is about a 2/3rds cut in payroll taxes which would be close to a 1/3rd cut in total revenue from income and payroll taxes combined. Obviously that is not going to come close to being offset by a 10% increase in work hours since that would increase revenue by less than 10% of its original value. Further, in my experience this is towards the upper end of such estimates. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Laffer Curve
I'm just wondering if it is even possible for the supply and demand curves to be shaped shaped in such a way that the Laffer curve does not apply to some market. Since you asked... Take an income tax and the very standard constant elasticity formulations for demand and supply (they are called constant elasticity because a one percent increase in the wage always causes the same percentage increase in labor supply (b) and the same percentage decrease in labor demand (a) no matter what the wage is): Ld=D w^(-a) Ls=S [w(1-t)]^b which implies w=(Ld/D)^(-1/a)=(Ls/S)^(1/b) (1-t)^(-1) If I did my algebra correctly with Ld=Ls=L L^(1/b+1/a)=D^(1/a)S^(1/b) (1-t) or L=[D^(1/a)S^(1/b) (1-t)]^(ba/(a+b)) so Revenue=twL=C t (1-t)^[b(a-1)/(b+a)] (C a constant function of D and S) If a is less than 1 (a one percent increase in the wage causes less than a one percent decline in labor demand) and you take the limit as t goes to 1 you get revenue going to infinity - - not exactly a Laffer curve. With an elasticity of demand less than 1 wages rise more than enough to compensate for the reduction in labor supply caused by the tax increase. With these demand and supply equations a little calculus yields the result that the tax rate that maximizes revenue is t (rev. max)=(a+b)/[a(1+b)] which is greater than 1 (which is impossible the way the tax rate has been defined) if a is less than 1. It asymptotes to 1/(1+b) as minus the demand elasticity (a) goes to infinity and 1/a as supply elasticity ( b) goes to infinity (and therefore zero as both approach infinity). From what I remember, typical estimates of a are (a lot) less than 1, but some come in somewhat above it. Typical estimates of b are .1 with very high estimates for aggregate labor supply coming in around .2. Being generous (a=1.5, b=.2) that would give a revenue maximizing tax rate of .94. Another calculation you see is that people assume that demand is infinity elastic in the long run (which follows for small countries in some trade models with constant returns to scale) and compute 1/(1+b) as the revenue maximizing income tax. That will give you the sort of value that one poster mentioned (.8 ish). Note what you have to assume to get revenue maximizing rates down where income tax rates are in thi! s country - - extremely high elasticities of demand along with Ls elasticities of close to 2 or more which are way out of bounds for anything anyone has computed for long run supply (think about what it would imply for what the work week should have done over the last century if elasticities were that high). Another calculation you can perform with these equations is what the effect of a tax increase will be on revenue. With a=1.5 and b=.2 and a tax rate of 33% a one percentage point increase in the tax rate causes about a 29 percent increase in revenues - - obviously not a whole lot of leakage due to decreasing labor supply and demand. The main reason why the Laffer curve takes so much abuse is calculations like this. I don't know of any serious public finance economists who believe that we are anywhere near the point of maximum revenue on most important taxes. Anyone working in public finance knew full well that additional tax revenue wouldn't equal the change in the tax rate times current wL long before Laffer drew his curve on a napkin for Jack Kemp, but those people knew better than to suggest that a tax cut could be self financing. The only cuts I've ever seen where serious arguments were made that they were self financing were capital gains cuts (for example the cut in 78). There was a fall in revenue from capital gains taxes when they were increased in 1987, but that appears to have been due to a huge flurry of selling of assets in December of 86 in anticipation of the higher rates and really says nothing about what the long run revenue effects of the higher rates would be. In my judgement reasonabl! e estimates still suggest that even capital gains tax increases are revenue increasing in the long run. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Laffer Curve
Without understanding the parts I snipped I would like to point out that if *my* tax rate was .94, I would need no more incentive to derive 100% of my income from the underground economy. Or is this just one of those counter-intuitive economic conclusions? Throw me a bone here. ;-) Perfectly reasonable. However, I wasn't trying to answer the question of what the true revenue maximizing tax rate is. Rather I was responding to the questioner who wanted to know if there was any supply and demand system that didn't yield a Laffer curve and I was showing that the very standard log-linear demand and supply curves (constant elasticity of demand and supply) give that result. I then showed what other results you can get from manipulating that model. No one believes that the world is exactly log-linear, and increasing tax evasion with higher tax rates is as good a reason as any to be suspicious of trying to forecast the effects of tax increases much beyond current tax rates. That said, the calculations I proposed that showed: 1) what the current tax yield for an increase in the tax rate is, and 2) what elasticities would be needed to get the revenue maximizing rate down into range of current tax rates, do not involve projection outside the range of our recent experience and therefore are not subject to that criticism. The log-linear demand and supply system can be viewed as first order approximations to any general demand and supply system and is therefore not likely to give you results that are very far off assuming the parameter estimates are correct. In other words, we have no idea what tax rates would maximize revenue, but we do know we are nowhere near them right now - - at least not without brining in other factors besides labor supply and demand. Some people have tried to argue that savings and investment increase substantially with income tax cuts, but I'm pretty sure that CBOs dynamic scoring takes such effects into account and shows almost no significant effect from that at current tax rates. CBO is headed by a former member of Ws Council of Economic Advisors who brought dynamic scoring to CBO and can hardly be called an ideologue of any stripe. There are lots of reasonable objections to raising taxes. You can decide that you don't think that tax revenue is put to good uses. You can believe that ethically taxation is theft. But there is no reasonable argument (at least none that I've seen) that tax increases in any range we've seen in this country don't raise revenue. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Unemployment rates and trade deficits
Hi Cyril, Actually I wrote a review article on this literature over a decade ago. You can find it in my book with Laura Tyson and John Zysman _The Dynamics of Trade and Employment_ Ballinger 1988. I'm sure there are better and more recent reviews, but I haven't kept up with the literature. As you suspect, it is a very well studied question, but not a particularly well defined one. A lot of people have done the exercise of breaking imports and exports down into 70 or so product categories and computing the labor use due to each from an input-output matrix. You take the labor used to produce exports and subtract the labor demand lost due to imports and you get a net labor demand effect of the current account (preferred to the trade balance since it includes services and is thus a more complete measure of economic output involved in trade). It gives you pretty much the same result as taking the trade deficit and dividing it by labor productivity. Problem is, the trade deficit isn't just something that happens to us. It doesn't really make sense to talk about the effect of the trade deficit or the current account deficit since both are as much effects of economic events as causes of them. Take your regression. You get the standard result that deficits are negatively related to unemployment. The standard explanation for that is that when the US grows quickly (relative to the rest of the world) our incomes grow and demand for imports grows more than proportionally with income so the trade deficits worsen. It isn't that the trade deficit is causing low unemployment - - the normal explanation reverses the causation. So what causes the trade deficit and what are the effects of those things on unemployment? I've already mentioned one. When we grow more quickly than the rest of the world we import more and that causes a trade deficit. Another factor that affects the relative demand of foreign vs. domestic goods is the exchange rate - - for us the price of foreign currency that we have to pay to buy foreign goods. For a long time in the 90s the US dollar was very valuable relative to other currencies and this made other country's goods very cheap. There have been studies that show that when some exogenous factor (ie. one that effects things in the system we are studying without being affected by anything in that system) causes the value of the dollar to go up that has a negative impact on US employment, but during the 90s it was the booming economy that was probably responsible for the dollar being strong (more on that in a moment) and the dollar going up in value only partially offset! the effects of the booming economy leaving unemployment very low. But there is a flip side to the trade deficit that also figures heavily in the picture. If we are going to buy more goods from abroad than we sell, accounts have to balance some how. If we are getting more goods and services than we are selling then someone on the other side of the transaction must be willing to take our dollars and hold them. If we don't export goods and services we have to export ownership of American assets to exactly offset the current account deficit. Normally foreigners are only going to be willing to do this if saving money in dollars is a better deal than saving money in their own currency. This could happen for a number of reasons. It could be because our economy is booming and investments in dollar denominated assets like stocks are yielding a good return. It can also happen if our interest rates are high relative to the rest of the world. You sometimes hear that budget deficits cause trade deficits. The normal mechanism for explaining how th! is happens is that budget deficits drive up interest rates which attract foreign lenders who want dollars. They buy dollars with their own currency driving up the value of the dollar and making foreign goods cheap so that consumers spend the extra foreign currency on imports. If a trade deficit is caused by a booming economy or a government budget deficit, it is normally thought that the trade deficit offsets some of the employment creating effects of these exogenous causes (not that a booming economy is exogenous, but whatever the policy or event was that caused the boom would be). But an increase in investment in the US can also happen if the rest of the world has excess savings and there aren't good investments anywhere else, or simply because investments in the US look good because they seem relatively safe, or because a lot of international trade is done in dollars and countries wanting to hold reserves of currency to pay for trade may want to hold dollars. In that case it is possible for foreign investment in the US to have a depressing effect on the US economy by causing the dollar to go up in value. There is yet one more commonly discussed cause of a trade deficit and it is typically thought that it
State IQ and why Libertarians should all become Democrats
Those guys are Marginal Revolution already got to that Economist article:http://www.marginalrevolution.com/marginalrevolution/2004/05/iq_hoax.html So your claiming that the data in the article in the economist can't be found in the Lynn book? I would be very surprised at that. The Economist is not a wild liberal hack journal and they normally check their sources. Also, as much as I disagree with Lynn's conclusions in the book, it is very carefully researched. Further, I've done my own analysis of stateAFQT using the NLSY. The sample sizes are very small, so you wouldn't want to believe the state by state numbers, and although I haven't done the correlation with the Gore vs. Bush vote by state, I can tell you that the South and the West trails the East and the Midwest significantly within race. I would be very surprised if there wasn't a strong positive correlation between Gore vote and state IQ. I saw Sailer's piece on this and although he calls the table phony, heaps scorn on liberals who like the table but don't like to admit that blacks score lower on IQ tests, and provides alternative evidence on the question that the table purports to answer, as far as I can see he never tells us directly that the data on state IQ can't be found in Lynn's book. Has anyone looked? I've read the book and don't remember seeing it, but I could have missed it (its a long book and I would have skipped over a section on US states since I was reading it for the international evidence). Like I said, I doubt the economist would publish the table without checking the book. My point in raising this was not that Republican's are stupid. The data Sailer cites on party identification by years of school is probably exactly reflective of party identification by cognitive ability - - people with little schooling and people with post graduate degrees are most likely to be Democrats while people with college degrees are most likely to be Republican. I suspect that IQ would follow the same U shaped pattern and that the causation of the relationship has more to do with geography than cognitive ability. Bush's support is greatest in rural areas and rural states. That is where you find the most poor whites with the lowest cognitive ability and a lot of the sorts of pathological behavior that has been commented on. Yes, there is a black-white dimension to this (that explains DC in Sailer's NAEP data), but there is the same rural-urban gradient for blacks as for whites, and the tests are just as predictive of the behaviors in question for blacks as whites. What does all this mean? Certainly it does not mean that stupid immoral people vote for Bush. I think the argument of reverse causation is basically right. There can be little doubt that there has been a massive change in social norms over the last 50 years - - a huge shift in favor of individual liberty over social conformity that I would expect most people who subscribe to this list would applaud. I would argue that middle class people have benefitted from these social changes, but the poor have seen their families crumble while their relative incomes have been falling due to economic change. Not surprisingly they feel under assault and not surprisingly they become social reactionaries and "values voters." Because the Democratic party is allied with gay and women's rights movements it can only appeal to these people on economic grounds and the economy isn't bad enough for that to work. So poor, low cognitive ability, states with lots of single moms, divorces etc. vote Republican. What you libertarians ought to be wondering is whether your tax cuts are worth the cost of being part of a Republican party going in this direction. You can't like theidea of legislating fundamentalistmoral strictures.I would also argue that the fiscal irresponsibility that the Bush administration has shown isinherent in this strategy. IfRepublicans started cutting the social programs they would have to cut to pay for their tax cuts it would hurt these poor white constituents andturn them back to theDemocrats (who do you think gets most SSDI, food stamps, TANF - - not urban blacks). I suspect most of you don't like this aspect of the Bush strategy either. So what's a libertarian to do? I suspect that most of you would be much more comfortable in the moderate wing of the Democratic party these days. You would find a lot of people (like me) who would be willing to compromise on things like regulation and taxes(we're technocrats and like efficiency) in order to preserve individual liberty. Moderate Democrats are fiscal conservatives these days (actually they always have been except for a willingness to run counter cyclical fiscal policy). Further, moderates would welcome you. We are all pro free trade and shudder at the gains the anti-globalization people have made in the party in the last four years. I feel I have more in common with many libertarians than I do with the more liberal members of my own
Re: Oscar Political Business Cycle
Sure it does if you think that high box office movies are also likely to be prize winners! Everybody wants to release their film at Christmas, but unless it is really really good you know that you are going to play second fiddle to the good movies. Thus you release at some other time if you aren't going to do well at the box office. - - Bill Bryan Caplan [EMAIL PROTECTED] 01/05/04 01:14AM But this wouldn't explain the clustering of *plausible prize-winners* (many of which are not big grossers) around Xmas. - Original Message - From: William Dickens [EMAIL PROTECTED] Date: Saturday, January 3, 2004 9:55 am Subject: Re: Oscar Political Business Cycle I thought the explanation for the grouping of releases around holidays was that that was when the box office was biggest. Why release movies at any other time? If you have a movie that isn't that great you release it at another time when the competition won't be as strong for first run box office. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens Bryan Caplan [EMAIL PROTECTED] 12/31/03 02:07AM The Political Business Cycle story has not fared well empirically in recent years (though Kevin Grier has done interesting work on Mexico's PBC). But it seems overwhelming in the Oscars. It seems like roughly half of the big nominees get released in December. What gives? Is there any way to explain this other than Academy voters' amnesia? I guess there is a small intertemporal benefit - if you could win Best Picture of 2004 with a January 2004 release, or Best Picture of 2003 with a December 2003 release, the present value of the latter prize would presumably be higher. But can that one year's interest (presumably adjusted for a lower probability of winning due to tighter deadlines) explain the December lump?
Re: Oscar Political Business Cycle
Sure it does if you think that high box office movies are also likely to be prize winners! Everybody wants to release their film at Christmas, but unless it is really really good you know that you are going to play second fiddle to the good movies. Thus you release at some other time if you aren't going to do well at the box office. - - Bill [EMAIL PROTECTED] 01/05/04 01:14AM But this wouldn't explain the clustering of *plausible prize-winners* (many of which are not big grossers) around Xmas. - Original Message - From: William Dickens [EMAIL PROTECTED] Date: Saturday, January 3, 2004 9:55 am Subject: Re: Oscar Political Business Cycle I thought the explanation for the grouping of releases around holidays was that that was when the box office was biggest. Why release movies at any other time? If you have a movie that isn't that great you release it at another time when the competition won't be as strong for first run box office. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens Bryan Caplan [EMAIL PROTECTED] 12/31/03 02:07AM The Political Business Cycle story has not fared well empirically in recent years (though Kevin Grier has done interesting work on Mexico's PBC). But it seems overwhelming in the Oscars. It seems like roughly half of the big nominees get released in December. What gives? Is there any way to explain this other than Academy voters' amnesia? I guess there is a small intertemporal benefit - if you could win Best Picture of 2004 with a January 2004 release, or Best Picture of 2003 with a December 2003 release, the present value of the latter prize would presumably be higher. But can that one year's interest (presumably adjusted for a lower probability of winning due to tighter deadlines) explain the December lump?
Re: Real wages constant since 1964?!
Not my class! I remember laboring for a while under the misimpression that hedonic methods were used for autos (they aren't), but when you took Econ 1 from me I certainly never said the CPI wasn't adjusted for quality. And yes, you can go the BLS web links that I had in my original post and read the technical documentation. This is, and has been for a long time, a major issue that people spend a lot of time thinking about. I think you are remembering your undergraduate education incorrectly (it has been a while Bryan). Some goods don't get any quality adjustment. It is possible that that is what you are remembering. There are cases where there are quality changes and no adjustment, but every index is, and always has been (as far as I know), adjusted to some extent to allow for quality changes. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens Bryan Caplan [EMAIL PROTECTED] 12/04/03 02:43PM Really? Every undergraduate class I can remember listed the failure to adjust for quality as one of the main problems with the CPI. And I don't think they just said it was inadequate. William Dickens wrote: This is completely wrong. The CPI-u is, and the CPI-x was, adjusted for quality changes (see http://www.bls.gov/cpi/home.htm ). The CPI-X doesn't exist anymore. So what price statistic wasn't adjusted for quality changes? They all are. No one (who knew what he was talking about) has ever claimed that they are not adjusted. The common claim is that the adjustments (which are quite complex and differ across different types of goods) are inadequate. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Infancy conforms to nobody: all conform to it, so that one babe commonly makes four or five out of the adults who prattle and play to it. --Ralph Waldo Emerson, Self-Reliance
Re: Real wages constant since 1964?!
David Levenstam wrote: Yes, the BLS series uses CPI-u to deflate the nominal wage series. Since CPI-u doesn't account for changes in the quality of goods or the market basket, and overstates inflation more the higher the actual rate of inflation, for the inflationary period from roughly 1968-1983 the BLS series understates real wages. Using a better deflator, CPI-x, which accounts for changes in the market basket (though perhaps not for changes in quality) discloses that real wages have indeed risen quite a bit since 1964. This is completely wrong. The CPI-u is, and the CPI-x was, adjusted for quality changes (see http://www.bls.gov/cpi/home.htm ). The CPI-X doesn't exist anymore. It has been replaced by CPI-U-rs ( http://www.bls.gov/cpi/cpirsdc.htm ) which takes all the methodological improvements introduced in the CPI in the last few years and computes what the CPI would have been if those changes had been in place all along (the published CPI-u for any given date reflects whatever methodology was in place at the time of the initial release). The most important change in explaining the difference between the CPI-u-rs and the CPI-u is the treatment of housing during the late 70s and early 80s when rents were much lower than the imputed cost of new housing based on current mortgage rates. There is a very big question as to whether the CPIs current methods for dealing with quality change are adequate. On the one hand there are lots of ways that they probably fail to pick up quality improvements (service industry output is notoriously difficult to measure so quality improvements are very hard to discern). On the other hand, there are clear cases where methods over state quality change. For example, every time a new product is introduced that replaces an old one the entire increase in price is attributed to improved quality rather than treated as a price increase. Since the introduction of a new product is also an opportunity to change the price, one suspects that at least some inflation will get factored into such changes, but will be ignored. Also, a lot of people wonder whether the hedonic methods used to compute the increases in quality of computers isn't overstating those gains (which are a very big part of productivity gains over the last decade). The value of an increase in memory or speed is judged by what those who buy it are willing to pay for it when both old and new machines are being sold, but we know that those who run out and buy the fastest new machine when it comes out probably value speed etc. a lot more than those who don't buy. When the price goes down enough so that everybody buys what used to be the fastest machine the CPI quality adjustment assumes that even the last people to get the fast machine value it as much as the marginal person when the machine was relatively new. Most economists who study these issues think that the CPI (even the new research series) still understates quality change on average though most also think that the understatement is quite modest (less than the Boskin commission's estimates of 2%). However, Janet Norwood (who was BLS commissioner during the last Republican administration) has argued to me that the CPI probably over estimates quality change for the reasons I mentioned above. Her guess was that the overestimate was about 1% or less per year. Obviously 1% error either way for 30+ years is going to make a huge difference in what we think has happened to real wages. Given the methodological uncertainty I doubt we could ever know for sure. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Real wages constant since 1964?!
This is completely wrong. The CPI-u is, and the CPI-x was, adjusted for quality changes (see http://www.bls.gov/cpi/home.htm ). The CPI-X doesn't exist anymore. So what price statistic wasn't adjusted for quality changes? They all are. No one (who knew what he was talking about) has ever claimed that they are not adjusted. The common claim is that the adjustments (which are quite complex and differ across different types of goods) are inadequate. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
