Category: Economics
Corporate taxes matter, incentives matter, but does economics matter?
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
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.
The death of deterrence?
In the last 48 hours:
Iran-backed Hamas firing on Israel.
Iran-backed Hezbollah firing on Israel.
Iran-backed Houthis firing on US warships.
Iran-backed Islamic Resistance firing on US forces.— Rebeccah Heinrichs (@RLHeinrichs) October 20, 2023
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.
Will AI cause a market crash/
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
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?
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.
The Great Depression is Over!
Throughout the 20th century, the Great Depression dominated macroeconomic discourse, engaging prominent economists such as Keynes, Hayek, Friedman, Lucas, and Prescott. Most 
principles of macroeconomics textbooks spend considerable time analyzing the Great Depression as it was this event which galvanized thinking about aggregate demand, bank runs, fiscal policy and money policy. However, the Great Depression occurred nearly a century ago and in a vastly different world, rendering its analysis more relevant to economic history than contemporary macroeconomics. We think it’s time to revise.
In the forthcoming edition of Modern Principles we excise the Great Depression and focus instead on the Great Financial Crisis and the Pandemic Recession as exemplifying the core of macroeconomics and policy. These events showcase a demand-driven recession followed by a supply-driven one, well illustrated by our dynamic AD-AS model. Focusing on these recessions also moves the lessons beyond the shifting of curves and towards important discussions of shadow banking, securitization, the microeconomics of externalities, and how monetary and fiscal policy must change when the goal – as during a pandemic — is not to get people back to work!
The lessons drawn from these significant and more recent recessions will inform policymakers as they deal with future recessions and will be the subject of analysis by economists for generations to come. A textbook for the 21st century must analyze the macroeconomics of the 21st century.
The Effect of Organizations on Physician Prescribing Opioids
Here is one of the more important IO papers in recent times:
In theory, there are several reasons why physician organizational form might affect the price, quantity, and quality of physician services. In this paper, we examine the effect of three aspects of physician organizational form on opioid prescribing: the number of physicians in the physician’s group (if any); the physician’s integration with or employment by a hospital or hospital system; and the average age of the other physicians in the physician’s group. We present three key findings. First, all else held constant, group physicians prescribe far fewer opioids, and prescribe them more appropriately, than do solo physicians. Second, although physicians who are employed by a hospital or practice in a hospital-owned group prescribe fewer opioids than do independent physicians, there is evidence that this difference may be due to differences in the other characteristics of physicians who are hospital-integrated rather than a causal effect. Third, we find substantial peer effects on opioid prescribing. Physicians in groups with a higher average age (excluding the physician him- or herself) prescribe more intensively and are more likely to write inappropriate opioid prescriptions than physicians in younger groups – holding constant the physician’s own age and other characteristics of his or her group.
That is from a new NBER working paper by M. Kate Bundorf, Daniel Kessler, and Sahil Lalwani.
The Calverts Cliff Decision
By the early 1970s, Atomic Age dreams of ubiquitous nuclear power were evaporating as fast as those Space Age fantasies of humanity soon spreading out into the solar system. The data show a clear break in nuclear reactor construction in 1971 and 1972, which suggests the decline in reactor construction is likely attributable to a confluence of regulatory events, perhaps creating uncertainty about the future cost of safety regulations. Two of the most important events happened in 1971: the creation of the Environmental Protection Agency and the Calvert Cliffs decision, in which the DC Circuit Court ordered federal regulators to comply with the National Environmental Policy Act of 1970, widely considered the “Magna Carta” of federal environmental laws. Basically, NEPA and related executive orders require federal agencies to investigate and assess the potential environmental costs, if any, of its projects and solicit public input. (At least twenty states and localities have their own such statutes, known as “little NEPAs.”) The following passage from the Calvert decision gives a good feel for the era’s Down Wing attitude: “These cases are only the beginning of what promises to become a flood of new litigation…seeking judicial assistance in protecting our natural environment. Several recently enacted statutes attest to the commitment of the Government to control, at long last, the destructive engine of material ‘progress.’”
Wow. They wanted to stop the the engine of material progress and they did. Right out of Atlas Shrugged.
This is from The Conservative Futurist: How to Create the Sci-Fi World We Were Promised, James Pethokoukis’s cheery introduction to ending the great stagnation. Pethokoukis ably covers all the big debates about the causes, consequences and solutions to the great stagnation and does so briskly, with optimism and covering culture as well as economics. Recommended as a one-stop shop for ending the great stagnation and as a pick-me-up.
The Great Spanish Estancamiento (from my email)
I’ve read an interesting article over at “El Pais” on the Spanish stagnation ( https://cincodias.elpais.com/opinion/2023-10-10/por-que-no-cambia-el-modelo-productivo-espanol.html , paywalled). Some interesting bits:
– Spain’s GDP per capita, measured at constant prices in 2022, has shown minimal growth compared to 2007, with just a 0.8 per cent increase over 15 years. Meanwhile, other European countries have seen significant growth: France by 7 per cent, the Netherlands by 10.7 per cent, and Germany by 13.7 per cent.
– Spanish productivity is being dragged down by small businesses, while medium and large companies perform closer to the EU average.The article claims that “la particularidad española es que el peso relativo de estas empresas pequeñas en el tejido productivo es mucho mayor que en los países vecinos”.
My digression: some (https://cepr.org/voxeu/columns/italys-productivity-conundrum-role-resource-misallocation) point out that in Italy TFP is declining because of large firms.
– In 2022, the rate of “early leavers from education and training” has reached 13.9 per cent. In the EU only Romania surpasses Spain in this regard. The authors point to tourism as the main culprit. But in the two EU countries where tourism contributes the largest share to GDP – Croatia and Greece – the percentage of such young people is the lowest ( https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:V2-early-leavers-230523.png ).
The authors support some sort of industrial policy for Spain as a way to overcome the stagnation. Even with the changing climate of opinion in Brussels and a more mercantilist mindset, I doubt that a full-blown, national industrial policy is possible within the EU. Probably, as with Italy (see: https://www.tandfonline.com/doi/full/10.1080/09538259.2022.2091408 ), without constraints imposed by Brussels, the stagnation wouldn’t be as deep as it is.
It would be great to see a comparative analysis of TFP stagnation in the European South!
That is from Krzysztof Tyszka-Drozdowski.
Upzoning with Strings Attached
The subtitle of this paper is: “Evidence from Seattle’s Affordable Housing Mandate.” Here is the abstract:
This paper analyzes the effects of a major municipal residential land use reform on new home construction and developer behavior. We examine Seattle’s Mandatory Housing Affordability (MHA) program, which relaxed zoning regulations while also encouraging affordable housing construction in 33 neighborhoods in 2017 and 2019. The reforms allowed for more dense new development (‘upzoning’), but they also required developers to either reserve some units of each project as below market rate rentals or pay into a citywide affordable housing fund. Using a difference-in-differences estimation comparing areas the reforms affected versus those not affected, we show new construction differentially fell in the upzoned, affordability-mandated census blocks. Our quasi-experimental border design finds strong evidence of developers strategically siting projects away from MHA-zoned plots – despite their upzoning – and instead to nearby blocks and parcels not subject to the program’s affordability requirements. The differential reduction from MHA to non-MHA zones could be as large as 70% of average permitting activity at the border. Lowrise multifamily and mixed-use development. Our findings speak to the mixed results of allowing for more density while simultaneously mandating affordable housing for the same project.
That is by Betty Xiao Wang and Jacob Krimmel. Via the excellent Kevin Lewis.
Does alleviating poverty increase cognitive performance?
From an RCT by Barnabas Szaszi et.al, due to travel I have not yet had the chance to look at this one:
In this Registered Report, we investigated the impact of a cash transfer based poverty alleviation program on cognitive performance. We analyzed data from a randomized controlled trial conducted on low-income, high-risk individuals in Liberia where a random half of the participants (n=251) received a $200 lump-sum unconditional cash transfer – equivalent approximately to 300% of their monthly income – while the other half (n= 222) did not. We tested both the short-term (2-5 weeks) and the long-term (12-13 months) impact of the treatment via several executive function measures. The observed effect sizes of cash transfers on cognitive performance (b = 0.13 for the short- and b = 0.08 for the long-term) were roughly three and four times smaller than suggested by prior non-randomized research. Bayesian analyses revealed that the overall evidence supporting the existence of these effects is inconclusive. A multiverse analysis showed that neither alternative analytical specifications nor alternative processing of the dataset changed the results consistently. However cognitive performance varied between the executive function measures, suggesting that cash transfers may affect the subcomponents of executive function differently.
Via Michelle Dawson.
How will AI remake the rules of international trade?
That is the topic of my latest Bloomberg column, here is one excerpt:
Posting a query to ChatGPT consumes a lot of energy, by one estimate 10 times more than a Google search. Currently large language models are sufficiently limited that this is not a major factor in aggregate energy consumption. But as use of AI services increases, the energy burden will rise. Countries with expensive energy, or which will not allow energy consumption to rise much for climate or regulatory reasons, will look to import their AI services from energy-rich countries.
In the future, energy-rich regions may include Spain and Morocco with solar power, South Korea with affordable nuclear power, and whichever nations are pioneers in nuclear fusion. Those nations may end up as major exporters of AI-generated data. They might draw their AI inputs from the US, but specialize in cheap calculation and information transmission. And some regions of America may join this list as well, especially if they are well-suited for solar and hydroelectric power.
To be clear, the US will export a lot of AI services, through such companies as OpenAI, Google, Meta and Anthropic. But the US is not as good at building affordable infrastructure, and that will put it at a disadvantage in the AI revolution and distribute many of the gains abroad.
It remains to be seen whether there are higher profits in selling the original source code or the more derivative electricity-driven, infrastructure-based AI calculations. Nonetheless, this is a potential economic and national security risk for the US. It could end up with a strong lead in the source product, but fall badly behind in making (“manufacturing,” you could say) the final AI outputs.
Recommended.
Building networks: Investigating the quid pro quo between local politicians & developers
My latest paper, Building Networks, is with Vaidehi Tandel and Sahil Gandhi in the Journal of Development Economics. We look at the connection between politics and land markets in Mumbai, India. The subject is inherently difficult to analyze because most such connections are illicit and under the table. What we find, however, is that when the local politician loses power development projects slow down which suggests that it takes time to build the connections that are necessary to speed approval through the bureaucratic process. Much more in the paper.
Abstract: Mutually beneficial arrangements between politicians and real estate developers are common in many developing countries. We document what happens when the politician-developer nexus is disrupted by an election. We construct a novel dataset of real estate projects and electoral constituencies in Mumbai’s municipal government. We find that an incumbent party losing the election increases real estate project completion times by 5%. We find no effect of quasi-random redistricting or changes in voter preferences on project delays. We investigate two mechanisms for the slowdown associated with party turnover — delays in construction approvals around the time of the election and increase in litigation against projects after the election. While we see no rise in litigation, we find that delayed approvals near an election explain 23% of the increased total delays due to party change.
Will Detroit go Georgist?
The city now has a more ambitious plan to reduce the amount of vacant land. It intends to tax it. A lot. Will it work?
The idea, proposed by Mike Duggan, the city’s pugnacious mayor, is to replace Detroit’s current property tax with a split tax. In essence, assessors will distinguish between the value of its land and of the buildings on it. This done, the city’s property tax will be reduced from 2% for every $1 of assessed value (which is less than market value) to 0.6%. To make up for the revenues lost, land will be taxed at a new rate of 11.8%, whether or not it has anything built on it. In Michigan changes to property-tax rates have to be approved by voters. A law to allow that cleared its first hurdle in the state House in late September. A referendum could happen in February.
And this:
How come Detroit is able to try something so radical? One advantage, says Jay Rising, the city’s chief financial officer, is that the city now raises very little from its current system. In 1959, according to a study by the Lincoln Institute of Land Policy, a think-tank in Massachusetts, the city’s property tax raised over $1bn, adjusted for inflation. By 2019, after decades of economic decline, the figure had fallen to just $119m. “If this was 80% of our revenues, we’d be a lot more nervous,” says Mr Rising. In fact it is just 16%. Moreover, the value of residential land is very low, which makes it an easier sell to voters.
The hope is that taxing land more will in fact spur development.
Here is the full story from The Economist. Via Chris Weber, who (among other things) writes on matters related to Jacques Offenbach.