Month: October 2023

Corporate taxes matter, incentives matter, but does economics matter?

by  Tyler Cowen in

This paper combines administrative tax data and a model of global investment behavior to evaluate the investment and firm valuation effects of the Tax Cuts and Jobs Act (TCJA) of 2017, the largest corporate tax reduction in the history of the United States. We extend the canonical model of Hall and Jorgenson (1967) to a multinational setting in which a firm produces in domestic and international locations. We use the model to characterize and measure four determinants of domestic investment: domestic and foreign marginal tax rates and cost-of-capital subsidies. We estimate elasticities of domestic investment with respect to each and use them to identify the structural parameters of our model, to quantify which parts of the reform mattered most to investment, and to conduct policy counterfactuals. We have five main findings. First, the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change. Second, the TCJA created large incentives for some U.S. multinationals to increase foreign capital, which rose substantially following the law change. Third, domestic investment also increases in response to foreign incentives, indicating complementarity between domestic and foreign capital in production. Fourth, the general equilibrium long-run effects of the TCJA on the domestic and total capital of U.S. firms are around 6% and 9%, respectively. Finally, in our model, the dynamic labor and corporate tax revenue feedback in the first 10 years is less than 2% of baseline corporate revenue, as investment growth causes both higher labor tax revenues from wage growth and offsetting corporate revenue declines from more depreciation deductions. Consequently, the fall in total corporate tax revenue from the tax cut is close to the static effect.

That is from a new NBER paper by Gabriel Chodorow-Reich, Matthew Smith, Owen Zidar, and Eric Zwick.  How many times has the NYT told you otherwise?  As I’ve noted in blog posts over the last six years or so, the standard literature already was indicating that such tax cuts are relatively effective (though no panaceas).  I hope this settles the matter, though I fear it will not…

Via Jason Furman, who also reproduces some nice pictures from the piece.

The polity that is Argentina

by  Tyler Cowen in

The current Peronist government has created or increased at least 27 taxes, often by decree. At least seven new exchange rates have been invented under this administration. In the run-up to the election, Mr Massa abolished income taxes for 99% of registered workers, increased wages for public employees and handed out a bonus in pesos worth $100 (converted at the official exchange rate) for pensioners.

Populism has contaminated trade, too. Successive Peronist administrations have cut the country off from international commerce in order to protect workers and keep domestic prices down. Trade as a percentage of gdp is just 33%, among the world’s lowest (it is 84% in Mexico and 64% in Chile). Such governments have also bashed the country’s main export sector, agriculture, as an oligarchy, and sought to hobble it by imposing export restrictions on farm produce. Exports of soya, the country’s main product, are taxed at 33%.

All of this means that most Argentines prefer to do things off the books. Banks, which in the past have effectively confiscated savings under government orders, are avoided. Domestic credit to the private sector is only 11% of gdp, compared with 83% in Chile.

Here is more from The Economist, an excellent survey.

*Eighteen Days in October*

by  Tyler Cowen in

That is the new and excellent book by Uri Kaufman, and the subtitle is The Yom Kippur War and How It Created the Modern Middle East.  Here is one excerpt:

The ordeal of the 314 Israelis who fell into captivity during the 1973 war — 248 in Egypt, 66 in Syria — did not end when they returned home.  All were sent to a facility — not to be treated for post-traumatic stress, which was then only thinly understood — but to find out what they had told their captors.  The facility was located in the Israeli town of Zichron Yakov; the men sent there nicknamed it “Stalag Zichron.”  It was a nice play on words because it literally translated to “Stalag Memory.”  Interrogators plumbed the depths of their memories, even giving some “truth serum,” ostensibly to treat shell shock.  In interviews of these soldiers years later, the word that comes up again and again is humiliation.  Elazar asked the men, “Why didn’t you do what Uri Ilan did?  What didn’t you commit suicide?”  On a radio program interviewing the survivors of Mezakh, former chief of staff Chaim Laskov said that “falling into captivity, surrendering, these are evasive things.  An order to surrender is illegal.  The only proper order is ‘every man for himself.'”

And this short bit:

It was Napoleon who famously prayed that if he had to face an enemy, please God let it be a coalition.

Recommended.

Building credibility?

by  Tyler Cowen in

Or do they want you to like and admire them?  Or maybe they are just telling the truth?

It’s no surprise that social media brims over with videos from real estate influencers. What’s astonishing is that property owners and landlords, some of the most broadly despised people in the country, are logging on to boast about the most ruthless and loathsome things they do. In one video, the protagonist of an account called Build Wealth With Gustavo laughingly bemoans the damage an evicted resident has done to his “house in the hood”; soon, he’s transforming it into an attractive $100,000 rehab project. In another, a landlord exhibits the “nightmare” of a rental trailer trashed by tenants, explaining that rents are so high “because of people like this.” Scroll on, and you might find a maintenance man dancing in the wreckage of an eviction while onscreen text explains his plans to add to the former occupant’s debt. “So who really got the last laugh,” it reads, alongside a smiley-face emoji.

Here is more from the NYT, via the excellent Kevin Lewis.  Don’t forget the comments of Alex T.

The death of deterrence?

by  Tyler Cowen in

https://twitter.com/RLHeinrichs/status/1715171574167261313

Not to mention Hamas attacking in the first place (you also can debate at whom the Houthis were aiming, probably not the U.S. per se).  And the 32 dead and 11 Americans unaccounted for.

Forget about moralizing and sides-taking for a moment, and just try to think this through as a game.  Either a) attacks of this nature recur and escalate, or b) the U.S. and/or Israel act to reestablish deterrence?  If b), what kind of act would suffice to reestablish some kind of effective deterrence?  Again, to think clearly please try to steer your attention away from the moral question of what you think the U.S. and/or Israel should do.

I date the decline (but not death) of deterrence to when Iraq fired 42 Scud missiles into Israel in 1991 and the Israelis did not retaliate.  That decision was widely praised at the time, and perhaps correctly.  Still, since then people have been solving for the equilibrium…and now that new equilibrium seems to be upon us.  What would Thomas Schelling say?  This is all worth a very serious ponder.

My excellent Conversation with Jacob Mikanowski

by  Tyler Cowen in

Here is the audio, video, and transcript.  Here is the episode summary:

Jacob Mikanowski is the author of one of Tyler’s favorite books this year called Goodbye, Eastern Europe: An Intimate History of a Divided Land. Tyler and Jacob sat down to discuss all things Eastern Europe, including the differences between Eastern and Western European humor, whether Poles are smiling more nowadays, why the best Polish folk art is from the south, the equilibrium for Kaliningrad and the Suwałki Gap, how Romania and Bulgaria will handle depopulation, whether Moldova has an independent future, the best city to party in, why there are so few Christian-Muslim issues in Albania, a nuanced take on Orbán and Hungarian politics, why food in Poland is so good now, why Stanisław Lem hasn’t gotten more attention in the West, how Eastern Europe has changed his view of humanity, his ideal two week itinerary in the region, what he’ll do next, and more.

Here is one excerpt:

COWEN: Why isn’t Stanisław Lem more popular in the West today as a writer?

MIKANOWSKI: That’s interesting. I grew up on Stanisław Lem like some people grow up on the Grimms’ Fairy Tales. My dad’s a computer scientist. His father set up one of Poland’s first computers. The world of Polish science and science fiction: he used to read the Tales of Pirx the Pilot and the Ijon Tichy stories — the robots, the short, fun ones — like they were fairy tales. I grew up with them.

I think — actually I have trouble going back to those. I’d go back to Solaris, and I think Solaris is a real masterpiece and I think it’s had lasting influence. But there’s something pessimistic about them. They don’t have that thing that Asimov does, or even Dune, of world-building and forecasting the human future far in advance. They are like Kafka in space, and that’s absurd situations, strange turns of events — I think a pretty pessimistic view of progress. Maybe that makes them hard to digest. Also a kind of odd sense of humor with the short stories. Almost a childlike sense of humor that maybe makes them hard to take.

I think there’s been a little bit of a Lem revival, though. I know technologists, some people like them; futurologists like him. I like him.

COWEN: Some of the cybernetics tales, they seem weirdly close to the current state of LLMs. And I think I’ve seen this mentioned once, but it’s not generally known: the idea that you use them to talk to, that they’re weird, they might be somewhat mystical, they serve as therapists or oracles — that’s very much in Lem, quite early.

MIKANOWSKI: I think people should go back to them. I think — I was just thinking of Solaris, which I always thought about as this story about contacting a truly alien alien. Now it’s like, well, this is a little bit of what we’re doing with virtual reality and AI. It’s like, what would happen if you could actually talk to your dreams, if you could revive people? You could have the mimicry of consciousness, the appearance of consciousness, without anything behind it — without a consciousness.

There’s something seductive about it, and there’s something monstrous about it. I think he was there way ahead of anyone else, and people should be going back to them. Maybe they will.

Of course we talk about the Suwalki Gap as well. And this: “Given all your study of Eastern Europe, what is it you feel you understand about the current war in Ukraine that maybe other well-informed people would not?”

Recommended, interesting throughout.  Again, here is Jacob’s new and excellent book Goodbye Eastern Europe: An Intimate History of a Divided Land.

Will AI cause a market crash/

by  Tyler Cowen in

Gary Gensler has been worrying about this, and calling for extra regulation, but the arguments behind his view are not so strong.  Here is one part from my latest Bloomberg column:

One fear is that a small number of AI base models could lead investors to herd behavior, where many of them sell (or buy) at the same time because their models have told them to. But the number of base models is likely to rise over time, not fall. AI is in a period of considerable innovation, with many startups being founded and many new trading and investing techniques being developed. Diversity, not uniformity, will reign.

The incentives of a trading firm are not to use the same model as everyone else, as that could lead them to sell into falling market panics or buy into temporarily rising prices — which is precisely what they should not do. Instead, a top trading firm will try to develop better models than its competitors. If a firm discovers that competitors are using a common model in a predictable way, it can identify the weaknesses of that model and trade against those firms.

There is much more at the link.

They are solving for the equilibrium

by  Tyler Cowen in

The Affordable Care Act of 2010 limited the profits of health insurers to between 15% and 20% of collected premiums, depending on the size of the health plan. But it imposed no restrictions on what physicians or other intermediaries can earn. The law created an incentive for insurers to buy clinics, pharmacies and the like, and to steer customers to them rather than rival providers. The strategy channels revenue from the profit-capped insurance business to uncapped subsidiaries, which in theory could let insurers keep more of the premiums paid by patients.

According to Irving Levin Associates, a research firm, between 2013 and August 2023 the nine health-care giants spent around $325bn on over 130 mergers and acquisitions.

Here is more from The Economist.

Is Tokyo really a YIMBY success story?

by  Tyler Cowen in

It is common lore in YIMBY circles that Tokyo is such an inexpensive city because Tokyo/Japan has allowed so much freedom to build.  Sometimes it is mentioned that Japanese building and regulatory decisions are made at higher levels than the strictly local, which lowers the power of the NIMBYs to restrict building.

I don’t doubt the key elements of this story, namely that Tokyo real estate is relatively cheap, and also that it is relatively easy to get a certain kind of construction through, including vertical construction, both up and underground.

Yet the more I think about it, the more I tend to believe a very different proposition: Japan is in key ways a very NIMBY country, and its brand of NIMBYism has keeps real estate prices down.

A corollary is this: YIMBYism gets much less credit for low Tokyo real estate prices, and furthermore the low real estate prices are a sign of something having gone wrong on the productivity side, in large part due to regulation.

As a piece of background information, note that Japanese productivity levels are about 60 percent of the United States.  And few have claimed that is because the Japanese do not work hard, or cannot coordinate well.  It is not a low-trust society.

Here are some key ways that Japan has been a NIMBY country, noting that I am not referring so much to construction per se, but rather to high-value, high-productivity construction:

1. Japan has had very tough immigration restrictions.  This has eased considerably, but a) the stock matters not just the flow, and b) current Japanese migrants often are from countries such as Thailand and the Philippines, which fills in for some mid-level jobs, but does not massively boost rents.

2. It is extremely difficult to learn written Japanese.  Among its other effects, this discourages high-value immigrants from settling into very high productivity service jobs in Tokyo or in Japan more generally.

3. Various regulatory and legal decisions have prevented Tokyo from developing into the financial capital of Asia (haven’t you wondered  about this?).  I won’t go into all the detail here, this is the modern world so just ask ChatGPT.  I’m sure you all know that major financial centers usually lead to exorbitant rents, due to the opportunity cost of the land.

4. So, so much of Japanese regulatory policy and culture is geared toward maintaining small retail businesses, super small in scale, and low in productivity.  They do not place much upward pressure on rents.  By the way, this is one reason why tourists find Tokyo so wonderful, but those enterprises lower productivity considerably relative to say Walmarts.  It is no accident that so many Japanese examples populate “Markets in Everything,” that they have cat and furry cafes, and so on.

Now, those are not building restrictions in the sense of passing a law “no such new building may be placed here.”  But they are significant — yes very significant — legal, institutional, and cultural restrictions on building out high productivity, high rent real estate options.  (Are you reminded of the 1980s debates on trade restrictions, when it was pointed out that so many of the Japanese trade barriers were indirect rather than upfront tariffs?  History is repeating itself here.)

The YIMBY movement just doesn’t talk about those indirect NIMBY-like Japanese restrictions so very much, at least not in the context of how they affect rent levels.  Instead, YIMBY wants to take credit for low Tokyo rents, but a much less regulated Tokyo market would in fact be considerably more expensive, not less expensive.

One accurate way to describe Tokyo would be: “They allow a lot of construction, yes.  But they make high value, high productivity construction extremely difficult to pull off.  They have their own Japanese unique blend of YIMBY + NIMBY, where the NIMBY parts of that equation are really a very important reason why Tokyo real estate prices stay so low.  So many factors push construction toward lower productivity construction options.”

And there you go.  Again we see that true YIMBY adds value, or can add value, but it very often raises rather than lowers rents.

Music podcast of me DJing for Rick Rubin

by  Tyler Cowen in

When I visited Rick over the summer in Italy, he asked me to DJ for him for many hours, maybe about seven?  This was amazing fun but also an intimidating challenge!  Anyway, this 90-minute podcast is the result of those sessions, edited and produced by Rick of course.   Here is the episode summary:

Tyler Cowen has long nurtured an obsession with music. It’s one of the few addictions Tyler believes is actually conducive to a fulfilling intellectual life.
In this bonus episode, an addendum to Rick’s conversation with Tyler, Rick sits with Tyler as he plays and talks through the music that moves him: from the outer bounds of the avant-garde to contemporary pop music and all points in between.

Recommended.